Interest-Only Fixed Rate Home Loans

Purchasing a home? Are you aware of interest-only fixed rate home loans? Savvy is here to inform you of your options.

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, updated on September 21st, 2023       

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Interest-only fixed rate home loans are often overlooked by home buyers. It’s important to know when you should opt for an interest-only fixed rate home loan and the benefits of doing so. Here we talk through the option of an interest-only fixed rate home loan and what it can do to help your home loan situation!

What is an interest-only fixed rate home loan?

An interest-only home loan is where you pay only the interest on your loan and none of the principal amount you borrowed from the lender. This loan only lasts for a certain period of time – typically one to five years. By paying only interest, you have lower repayments which can be beneficial to specific borrowers.

On top of this, an interest-only fixed rate home loan will allow the borrower to pay interest at a fixed rate through the initial interest-only period on your home loan. As opposed to a standard variable rate, a fixed rate will ensure the borrower is aware of their repayments in advance and can better prepare themselves accordingly.

Why should I choose an interest-only fixed rate home loan?

Whether you’re a first home buyer, property investor or looking to refinance, opting for an interest-only fixed rate home loan might be just the fit for you.

If you’re looking to save money in the short-term, the low repayments of an interest-only fixed rate home loan will suit you. Although you will be facing increased repayments in the long term, reduced repayments in the short term could allow you to use your cash elsewhere. Low repayments could also give you time to improve your cashflow, so you are prepared to meet increased repayments when you eventually switch to a P&I loan.

In addition, an interest-only fixed rate home loan will give you the comfort of financial certainty which a standard variable rate cannot offer. Knowing the cost of your repayments in advance with a fixed interest rate will allow you to plan for the future over the course of the fixed-rate period.

How do I compare interest-only fixed rate home loans?

In comparing interest-only fixed rate home loan options, it is important to keep an eye out for special fixed interest rate offers by lenders on the market.

Furthermore, it is important to check comparison rates in addition to the advertised fixed interest rates by lenders. Although a low advertised interest rate might be appealing at first glance, it doesn’t take into account a loan’s standard fees and charges like a comparison rate will. Certain loans may also charge non-standard costs which won’t be included in these comparison rates. Keep a close eye out and don’t overlook any of the small details!

You should also compare the features which each loan offers. Some loans will offer a low fixed rate at the expense of other features and vice versa. Certain loan features – such as a redraw facility – can help you make extra payments and reduce your debt while increasing equity in the property.

Pros and cons of interest-only fixed rate home loans


Benefits property investors who can claim the interest paid come tax time.

Fixed interest rate gives you certainty and helps you work out financial future.

Fixed rates are secure and will protect you in the instance of an interest rate rise from lenders.

Allows investors to hold property at a cheap monthly repayment amount as they await an increase in property prices.


Owner-occupiers who opt for an interest-only fixed rate home loan will be paying interest without paying off any of the principal amount of their loan. At the end of interest-only fixed rate period, repayments will increase substantially and might be a shock to a borrower’s finances if they’re not prepared.

Borrower will not benefit in the instance of interest rate cuts.

Should you look to break from your interest-only fixed rate loan, you may incur significant break fees.

Frequently asked questions about interest-only fixed rate home loans

Is an interest-only fixed rate home loan or a standard interest-only home loan better?

This depends on your situation as each have advantages and disadvantages. An interest-only fixed rate home loan benefits the borrower in preparing them for their repayments. If you are a borrower with limited cashflow who needs to plan their finances in advance, the fixed rate may prove beneficial.

What are some common features of interest-only fixed rate home loans?

Some main features associated with interest-only fixed rate home loans are offset accounts and redraw facilities. An offset account is a transaction account which is linked to directly to your loan while redraw facilities will allow you to access any extra payments you had previously made, but this may come at a cost depending on your lender.

As a property investor will I incur a greater fixed interest rate than that of an owner-occupier?

Yes. Property investors face higher fixed interest rates on their investment home loans than owner-occupiers as lenders are taking on greater risk with an investment home loan.

Is an interest-only fixed rate home loan better suited to a property investor or an owner-occupier?

An interest-only fixed rate home loan can suit either type of borrower depending on the situation. While a property investor may be best benefited by the tax benefits of an interest-only fixed rate home loan, the main benefit to an owner-occupier may be having a fixed interest rate which allows them to plan their finances in advance.

If I choose to change from my interest-only fixed rate home loan during the fixed term, what will happen?

If you go down this path you will likely be charged break fees by your lender. This can end up being a costly process and add significant expense to your home loan.

If interest rates rise or decrease during my fixed-rate period, will I be impacted?

No. One of the advantages of a fixed-rate home loan is that your individual fixed rate will not be impacted by any changes to interest rates. If lenders increase their interest rates, your individual rate and repayments will still remain the same. Likewise, if lenders lower their interest rates, you will be still be tied to the same fixed rate and could potentially be paying more than the market dictates.

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