Interest-Only Loans: Pros, Pitfalls and When They Make Sense
Christian Stevens, Mortgage Broker
Published January 31, 2025, 2:10 p.m ET
Interest-only home loans can be a smart tool when used strategically — especially for investors, high-income borrowers, or those managing cash flow in the short term. But they’re not for everyone.
Let’s break down what interest-only loans are, when they’re useful, and what to weigh up before committing.
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🔑 Key Facts
- Interest-only loans let you pay just the interest — not the principal — for a set period (usually 1–5 years).
- This reduces repayments in the short term, but you won’t reduce the loan balance during the interest-only period.
- Often used by investors, property flippers, or borrowers with short-term cash flow needs.
- Flint helps structure interest-only loans strategically, ensuring they align with your financial goals and exit plans.
What Is an Interest-Only Loan?
- An interest-only loan allows you to pay just the interest — not the principal — for an agreed period, usually between 1 and 5 years.
- During this time, your monthly repayments are lower than they would be on a principal and interest loan. However, you won’t be reducing the balance of the loan until the interest-only period ends.
When Does an Interest-Only Loan Make Sense?
Interest-only loans can suit a range of borrowers when used with a clear plan:
- Property investors looking to maximise cash flow: Lower repayments free up capital for renovations, additional investments, or offsetting rental shortfalls.
- Borrowers expecting a future income increase: Professionals on career growth trajectories may benefit from short-term cash flow relief.
- Those planning to sell or refinance soon: If you only intend to hold the property briefly, paying down principal may not be necessary.
- High-net-worth individuals with better use for cash elsewhere: Rather than tying up capital in repayments, funds can be invested or allocated more strategically.
Benefits of Interest-Only Loans
- Lower initial repayments: Useful for managing short-term cash flow or reducing pressure during the early stages of ownership.
- Tax deductibility for investors: For investment properties, interest is typically tax-deductible, and interest-only loans can help optimise deductions.
- Flexibility in capital allocation: Particularly for investors or business owners who want to deploy cash elsewhere.
- More control over repayments: You can still make extra repayments on some interest-only loans (particularly variable ones), though this varies by lender.
Risks and Considerations
- No equity growth through repayments: You’re not reducing the loan balance, so equity depends solely on property value increases.
- Higher repayments after the interest-only term ends: When the loan reverts to principal and interest, repayments jump sharply.
- Total interest paid may be higher over the life of the loan: Because you’re delaying principal reduction, you could pay more in total interest.
- Tighter lender scrutiny: Interest-only loans are more tightly regulated and assessed under stricter serviceability standards.
- Smart strategy: Always enter an interest-only loan with a clear plan — whether it’s to sell, refinance, or switch to principal and interest later.
Is Interest-Only Right for You?
Ask yourself:
- Are you purchasing a home or an investment?
- Do you have a plan to repay the principal down the track?
- Is your current cash flow under pressure, or could your funds be better used elsewhere?
- Are you comfortable with the idea that your debt won’t reduce during the interest-only period?
📞 Want Smarter Flexibility in Your Loan Strategy?
Flint can help you assess whether interest-only is the right fit — and ensure you’re not paying more than necessary in the long run:
- Compare interest-only vs principal & interest based on your goals
- Structure your loan for flexibility and control
- Ensure you’re ready for repayment changes when the term ends
Talk to Flint today for tailored advice and strategic lending options that match your financial plans.
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