Australia's interest-only mortgages

Our infographic explains how interest-only mortgages have grown in Australia, how much people are borrowing for an interest-only loan and how much you will really pay for this type of loan.

interest-only mortgages infographic

Australia's interest-only mortgages (Accessible text version)

The average interest-only mortgage is $347k (2017). (Source: see source 1, below)

For owner-occupiers - 1 in 4 loans are interest-only. (Source: see source 2, below)

For investors - 2 in 3 loans are interest-only. (Source: see source 2, below)

Total amount borrowed in interest-only mortgages

  • $156 billion in 2015 (Source: see source 1, below)
  • $135.5 billion in 2017 (Source: see source 1, below)

Pitfalls of interest-only mortgages

  • Higher repayments when interest-only period ends
  • More expensive over life of the loan
  • Principal will not reduce
  • Interest rate may be higher than a principal and interest loan

Benefits of interest-only mortgages

  • Lower repayments at start of the loan
  • Greater tax deductions for investment properties
  • Can be used for a bridging or construction loan

Journey of interest-only loan borrowers

Each borrows $750,000 over 30 years. (Source: see source 3, below)

 

Principal and interest

(Lin-Yi and Bruce)

Interest-only for 5 years

(Amanda and Raj)

Interest-only for 5 years

(David and Louise)

Interest rate 3.95% 3.95% 4.25%
Monthly repayments during interest-only period $3,559 $2,469 $2,656
Monthly repayments after interest-only period $3,559 $3,938 $4,063
Total repayments made $1,281,251 $1,329,555 $1,378,286
Additional interest paid due to the interest-only period $0 $48,304 $97,035

Interest rates

  • Lin-Yi and Bruce got the lowest rate because they chose principal and interest.
  • Amanda and Raj would not be able to get this low rate on an interest-only loan, but this shows how much more they would pay if they did get the same principal and interest rate.
  • David and Louise pay a higher interest rate as they chose an interest-only loan. They will pay an additional $97,035 over the life of this loan compared with Lin Yi and Bruce's principal and interest loan with an interest rate of 3.95%.

Before you get an interest-only mortgage

  • Can I afford the higher repayments when the interest-only period ends?
  • Can I trust myself not to dip into my offset account?
  • Will the short-term benefits outweigh the long-term costs?
  • If I can't afford a principal and interest loan, is now the right time to borrow?

Things to consider:

  • Reduce costs - lower your interest payments by putting extra into an offset account
  • Review your plan - expand your property search to find a cheaper home
  • Shorten period - reduce the interest-only period to lower long-term repayments

Use our interest-only mortgage calculator to find out what it will really cost you.

Sources

1. APRA, Quarterly authorised deposit-taking institution property exposures: September 2017.

2. ASIC survey of 11 lenders, 2015. Data not publicly available.

3. Calculations using ASIC's MoneySmart interest-only mortgage calculator (excluding fees).


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Last updated: 14 Dec 2017