The Reserve Financial institution has upped the money fee for the third time this 12 months as value of residing pressures proceed to chunk. Might switching your mortgage to curiosity solely be a successful concept?
As rising rates of interest squeeze family budgets, many owner-occupiers are enquiring about interest-only dwelling loans — largely related to buyers — to slash short-term repayments and enhance money circulation.
The RBA’s third hike this 12 months took the money fee to 4.35%, in step with the 2024 peak, with extra hikes anticipated after inflation hit its highest since 2023 throughout April.
On a $500k 30-year mortgage, this new fee hike will translate to round $80 additional in month-to-month repayments, Mortgage Selection calculations present.
Mortgage Selection dealer Chantelle Rangel says fee rises, rising residing prices and the unsettling geopolitical state of affairs are weighing closely on patrons.
“Lots of shoppers have been nervous over the past three months and when rates of interest rise, there is a frenzy. Some are not sure whether or not to shift from principal and curiosity loans to curiosity solely.”
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The Reserve Financial institution of Australia has raised rates of interest 3 times this 12 months. Image: Getty
Principal and curiosity (P&I) means you repay each the mortgage steadiness and the curiosity every month, so the debt shrinks over time. Curiosity solely (IO) means you pay simply the curiosity for a set interval, so repayments are decrease at first, however the mortgage steadiness doesn’t go down.
Information from the Australian Prudential Regulation Authority (APRA) reveals the proportion of IO loans has risen over the past two years, from 11.1% of housing loans in December 2023 to 11.8% in December 2025.
However whereas there’s fast enchantment of going IO in a excessive rate of interest surroundings, the trade-offs are vital.
Execs
1. Decrease repayments within the quick time period
Switching to IO slashes month-to-month prices. Ms Rangel says on a $500k mortgage, you would save $400-$500 in repayments every month in comparison with P&I.
2. Freed-up money circulation
The largest draw? Further respiratory room throughout non permanent squeezes like job loss or sickness.
If going curiosity solely brings emotional aid for a time, it might be value it, Ms Rangel says.
“Residing paycheck to paycheck is hectic, so if releasing up some money for some time will assist enhance your lifestyle, it is value contemplating.”
3. Reinvesting the financial savings
Going IO may help you release money to spend money on extra profitable methods. Sensible buyers redirect these financial savings into additional properties, their proprietor offset accounts, or declare tax perks through unfavorable gearing.
Curiosity-only loans offer you different choices for methods to use your money. Image: Getty
“Should you’re reinvesting the cash some other place that is going to offer you larger returns, then that is smart,” stated Ms Rangel.
4. Flexibility to repay your principal
As soon as you have switched to IO, you may nonetheless make voluntary principal funds anytime. Plus, you may simply change again to P&I with only a fast cellphone name, says Ms Rangel.
Going curiosity solely, nevertheless, wants a contemporary utility and lender approval.
Cons
1. Larger rates of interest
Curiosity-only loans additionally include a premium, Ms Rangel warns.
“Proprietor-occupiers on a $500,000 P&I mortgage may need an rate of interest of 5.7%; on curiosity solely, this is able to enhance to round 6%. So when you’ll see a discount in your month-to-month repayments, that acquire is diluted a bit of.”
2. No principal discount
You are not chipping away at debt and are relying solely on capital to construct wealth, which stings in downturns.
Ms Rangel says most owner-occupiers need to repay their loans in lower than 30 years.
“If it is your personal property, it is debt that you do not need to have.”
Householders are inclined to prioritise paying off their mortgage. Image: Getty
3. No offset buffer
Further P&I funds construct redraw or offset security nets for powerful occasions, says Ms Rangel.
“Further repayments offer you a major steadiness in your redraw that you should use to tie you over via excessive rate of interest intervals.”
4. Lowered borrowing energy
Going IO also can harm your serviceability, largely because of the 3% serviceability buffer added to your fee to account for altering financial circumstances.
Whereas the buffer exists to make sure householders can afford repayments at a better fee if wanted, P&I loans begins from a decrease base fee. Including that very same buffer to an IO mortgage lowers your borrowing capability.
5. Strict limits and availability
You possibly can’t keep on IO ceaselessly; you could repay that debt. APRA caps IO at one to 5 years for owner-occupiers (10-15 for buyers), with complete lifetime limits. Sure banks typically additionally prohibit IO loans to buyers.
6. Reimbursement shock on reversion
When a house owner does revert to P&I, they face a pointy leap in repayments to clear the debt over the remaining time period.
“After 5 years IO for instance, repayments recalculate over 25 years, not 30,” Ms Rangel stated.
7. Extra curiosity total
That untouched principal racks up additional curiosity over the mortgage life. After 5 years of IO, chances are you’ll pay $30k-$50k extra on a $500k mortgage.
Curiosity-only loans in the end finish with having paid way more curiosity. Image: Getty
Doing the sums
Ms Rangel urges patrons and householders to crunch the numbers first earlier than switching from P&I to IO.
“Talk about how a lot repayments will enhance after the interest-only interval and what occurs if there is not any fairness within the property, you have not paid down your mortgage and also you need to buy one other, as a result of which will impression future selections.
“Going curiosity solely might release money circulation, nevertheless it’s necessary you perceive the long-term implications” she stated.
