Interest only home loans | Home loans - NAB
What is an interest only home loan?
An interest only home loan means that during the interest only period, you pay just the interest charged on your home loan and not the principal amount.
Your home loan is made up of two parts:
- Principal: the amount you borrow to buy your property.
- Interest: the amount you’re charged for borrowing the principal.
With an interest only home loan, you’re only paying the interest portion while the principal stays the same (during the interest only period). Interest only payments are lower than if you were paying both principal and interest, but your home loan balance (the principal amount) doesn’t reduce. This means you’ll pay more interest over the life of the loan.
Managing your interest only payments
There are two ways to make interest only payments:
In arrears
Your interest only charge is calculated based on your loan balance and debited from your nominated transaction account on the last banking day of each month. To avoid falling into arrears, it’s important to make sure you have sufficient funds available in your nominated transaction account by 5:00pm (AEST/AEDT) on the last banking day of each month (excluding weekends and Australia-wide public holidays). For example, if 31 January falls on a Sunday, then the last banking day of the month will be Friday 29 January.
Your interest charges can differ each month. This is because interest is calculated daily on your loan balance, and factors such as the number of days in the month and any funds in an offset account, can vary the amount of interest charged.
You can use our home loan repayment calculator to estimate what your monthly interest payments will be. Setting up a recurring payment can also help ensure your funds are ready when the payment is due to avoid missing a payment.
In advance
Your interest only payment is calculated based on your loan balance and paid annually in advance.
This option may offer tax benefits for property investors, so it’s best to confirm with your accountant first.
View your nominated transaction account using the NAB App
- Log into the NAB app on your device.
- Tap the home loan account you want to view the nominated transaction account details for.
- Tap the Manage button.
- Tap View scheduled payment to see your nominated transaction account details.
What happens when your interest only period ends?
When your interest only period ends, your home loan repayments will automatically switch to principal and interest. The balance of your home loan will then need to be repaid over the remaining loan term. This means your repayments will be higher than they were during the interest only period.
To prepare for the increase in repayments, make sure you know the expiry date of your interest only period. You can view these details in the NAB app and NAB Internet Banking.
When an interest only home loan might be right
There are certain benefits to choosing an interest only home loan. These include:
Important things to consider
- Interest rates for interest only home loans may be higher than if you were paying principal and interest (P&I).
- There are limits to how long you can have interest only periods – the maximum interest only period at any one time is five years for owner occupiers and 10 years for investors (credit criteria applies).
- Interest only is not available in the last five years of your loan.
Case study: Interest only versus principal and interest repayments
In this example, John and Rebecca have taken out a home loan of $500,000 for 30 years. To help illustrate the difference in repayment types, the same interest rate of 4.39% p.a. is used for both principal and interest repayments and interest only payments.
- Option 1: If they make principal and interest repayments from year 1, their monthly minimum repayments would be approximately $2,501.
- Option 2: If they choose interest only payments for the first 5 years:
- Their monthly minimum payments during the interest only period would be approximately $1,829.
- In year 6, their payments would revert to principal and interest, increasing to a minimum of $2,748 per month.
Choosing interest only for the first 5 years means paying $33,854 more in interest over the life of the loan compared with making principal and interest repayments from the start.
This is an example only of what may occur to show that interest only home loans mean paying more interest over the loan term. Actual repayments will vary, as variable interest rates can change over time and will affect the comparison.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.