fbpx

Interest-Only Mortgage Calculator

Figure out the cost of an interest-only mortgage for investors with Savvy’s handy calculator today.

Written by 
Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
Our authors
, updated on August 7th, 2023       

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

Interest-only loans come with big benefits for owner-builders and property investors.  Savvy’s interest-only mortgage calculator will tell you exactly what your interest-only loan repayments will be initially, and then later if your loan reverts to a principal and interest loan.

Interest-only mortgage explained

How do I use the interest-only mortage calculator?

There are two parts to an interest-only loan: the initial interest-only loan period and the second portion when the loan reverts to a principal and interest loan.  The interest-only mortgage repayment calculator allows you to enter information about both of these portions.  Simply enter in your loan amount, the interest rate and the loan term.  Use the green arrows to change the frequency of your repayments from weekly, to fortnightly or monthly.

Next, enter the interest-only period of the loan, plus any loan fees or charges that may apply, and then click anywhere on the interest-only loan repayment calculator page to see your results.  You can also use the interest-only calculator to play around with potential loan terms and loan amounts so you can see what difference these make to your loan repayments.

Who can benefit from an interest-only mortgage?

Interest-only mortgages and loans may not be the best type of loan for every new homeowner, as the principal sum borrowed isn’t reduced over the initial period.  Look at the graph in the interest-only mortgage repayment calculator to see a visual representation of how the loan principal remains untouched during the interest-only period.

However, for borrowers in specific circumstances, interest-only mortgages can be very useful and provide many positive benefits.  Such circumstances include:

  • owner builders on a tight budget who need to make staged payments to their builder as construction progresses
  • property investors who buy a property that needs renovation or redecoration before being tenanted
  • property investors who intend to hold their investment property for a short period of time before selling it again
  • first homebuyers who need low mortgage repayments in the first year or two while they cope with the additional expense of buying furniture and whitegoods to establish their new home
  • homebuyers requiring bridging finance to tide them over between the sale of one property and the purchase of another

How can an interest-only loan provide tax advantages?

Property investors are entitled to claim any interest charged on a loan for investment purposes as a tax deduction.  This means if an investor takes out an interest-only loan, the entire cost of servicing that loan can be claimed, which can provide a very valuable tax advantage.

Use the interest-only loan repayment calculator to tell you how much your total interest will be over the life of the loan – and this is the amount your will be able to claim as a tax deduction over the term of the loan.

For example, a software engineer in Sydney earns $125,000 p.a. and decides to buy an investment property, which he intends to renovate and rent out for five years before selling it.  He takes out an interest-only loan for $350,000 at 2.5% p.a. to enable him to buy a small unit.  His repayments on his interest-only loan are $729 per month, or approximately $8,750 per year.

At the end of the tax year, the engineer is able to claim the whole interest amount of $8,750 as a tax deduction against his $125,000 income, which means not only does he pay income tax on $8,750 less income, but the reduction in taxable income means he falls into a lower tax bracket, so instead of paying income tax at a rate of 37% (for incomes over $120,000) he now falls into the lower tax bracket and is only required to pay 32.5% income tax.

The pros and cons of having an interest-only mortgage

PROS

Tax advantages for property investors

As mentioned above, there are considerable tax advantages to be gained for property investors having an interest-only mortgage which is fully tax deductable as part of a negative gearing plan.

Home construction becomes more affordable

Building a new home can be a very expensive time, especially for first homeowners.  Having to pay only the interest on a home loan can provide welcome relief from large loan repayments during the most expensive phase of home construction.

Lower repayments whilst renovating

Property investors may go through periods without rental income, such as when they’re in between tenants or are renovating or redecorating their rental property.  Having lower loan repayments during a time of no investment income can assist investors get over these lean times.

Breathing space to clear other debts

Sometimes debt repayments can spiral out of control and become unmanageable.  In these circumstances, it can be advantageous to get an interest-only repayment agreement on your home loan to allow you time to pay off other debts, taking advantage of the lower repayments that come with an interest-only agreement.

CONS

Overall, a more expensive loan

Because your interest doesn’t reduce over the period that you’re paying interest-only, you’ll end up paying more interest overall than you would if it were P&I.  Additionally, interest rates on interest-only loans tend to be higher than on a principal and interest loan.  If you get an interest-only honeymoon period on your loan, the revert rate applied when your loan returns to principal and interest payments may possibly be higher than a standard home loan.

Possible tighter lending criteria

Some lenders apply tighter lending criteria for interest-only loans, so that only applicants with a good credit rating, or who are able to offer a larger than normal deposit, will be approved for an interest-only loan.

No gain in home loan equity

If you only pay the interest due on a loan, the principal amount you borrow remains untouched, so you are not gaining home loan equity by gradually paying off your principal sum.  Home loan equity can be useful when refinancing, or if you want to use your equity as a guarantee for another loan, or to assist your children to buy their first home by acting as a guarantor.

Revert rate repayment shock

If your interest-only loan reverts to a principal and interest (P&I) loan, the increase in repayments can come as a shock.  For example, if you have a 30-year, $350,000 loan with a 2.5% interest rate and a 3-year interest-only period, your initial repayments will be $336 a fortnight, but after three years they’ll increase to $685 a fortnight.

More frequently asked questions about interest only mortgages

Are interest rates for interest-only investment loans generally higher?

Yes – interest rates for interest-only investment loans do tend to be higher than P&I loans – generally about 0.5% to 1% higher than standard variable interest rates.  This reflects the increased risk which lenders perceive investment properties to be compared to standard residential properties.

Can I extend my interest-only fixed rate period if my home construction falls behind?

You can – lenders understand that sometimes construction projects can run over time and many will allow you to extend your fixed rate period if you do experience a time blow-out.  It is important to contact your lender as soon as you’re aware there may be issues with your construction time deadline.

Can I make extra repayments on my interest-only home loan?

Probably not.  Because your interest-only period is fixed, along with your interest rate, then additional repayments on the loan probably won’t be permitted until the loan reverts to a standard P&I loan.

Do all interest-only loans revert to P&I loans?

Yes – after the interest-only period of the loan is over, it will revert to a principal and interest loan unless you ask your lender to extend the interest-only period.  Usually, interest-only loans are only approved for a maximum of five years, although some can be extended to another five-year period depending on your lender.

Can I re-fix an interest-only loan once the initial fixed period has ended?

Yes – as mentioned above, it’s possible to do this, but you’ll need to talk to your loan provider before the end of the fixed interest-only period, otherwise your loan may revert to a P&I loan before you have time to change your loan conditions.  Allow at least two weeks before the end of your loan period to give your lender time to re-issue loan documents. If you think you will be unable to make the repayments once it reverts to a P&I loan, you could consider refinancing your mortgage to one with a longer loan term or a lower interest rate to make repayments more affordable.

What features are usually available with interest-only loans?

Many of the features of P&I loans are also available for interest-only loans.  These may include the ability to add a loan redraw facility, to split your loan between a fixed and variable rate, and the ability to make additional repayments too (although these aren’t always allowed and are sometimes capped).  Mortgage offset accounts are less common but are still available for interest only loans.

How do I compare interest-only loans?

Firstly, it’s crucial to look at the interest rate being offered and find a loan with the lowest rate possible.  However, you also need to consider which loan features (such as a redraw facility, or the ability to make extra repayments) you really want on your loan.  Fortunately, Savvy can help you compare a variety of home loans all in one place so you can find one that’s just right for your personal needs.

Helpful guides on home loans

How to cushion the cost of fixing your home

Have a maintenance plan in place A home, as you know, comes with valuables and your precious belongings that can break or get damaged. Not having a maintenance plan in...

All about refinancing an investment property

Most Australians see property investment as a means of achieving financial independence. Since unemployment rate in Australia reached an average of 5.6% in May 2016, people kept encountering difficulties with their investments....

The pros and cons of co-owning a property

What does it mean to co-own property? Simply put, co-owning property is when you partner up with two or more people to pool together finances to purchase a home. This...

5 ways to get a home loan with bad credit

Show that you are more financially responsible now Even though your past decisions are still haunting you, it is essential for you to demonstrate that the past remains in the...

We'd love to chat, how can we help?

By clicking "Submit", you agree to be contacted by a Savvy Agency Owner and to receive communications from Savvy which you can unsubscribe from at any time. Read our Privacy Policy.