What are the maximum interest-only periods on home loans?

Borrowers choose interest-only loans for a variety of reasons, but the main effect of choosing ‘IO’ is lowering your mortgage repayments. While you don’t chip away at the principal, IO loans can be used to minimise costs while settling into a property, finding tenants, or to realise capital growth then sell later to pay off the home loan in its entirety.

However, not all lenders are made equal when it comes to interest-only periods. Some may only allow for a few years, while others allow for a lot longer - it can also differ based on whether you’re an owner occupier or investor, plus how much of a deposit you have saved up.

Banks' and Lenders' Maximum Interest-Only Periods

Many institutions Savings.com.au spoke to had a maximum IO period of about five years however there were some variations. You’ll also have to double check if the IO period applies only to construction loans. Of the near 40 lenders Savings.com.au reached out to, the only lenders to not respond in time for deadline was Westpac.

Commonwealth Bank

CBA’s maximum interest-only period is five years, for both owner occupiers and investors.

NAB

NAB’s maximum IO period is five years for owner occupiers, and 10 years for investors.

ANZ

ANZ’s maximum IO period for owner occupiers is five years, while for investors it’s 10 years.

Westpac did not respond to Savings.com.au's correspondence.

86 400

Neobank 86 400 has a maximum interest-only period of five years for both owner occupiers and investors.

AMP

AMP’s maximum IO period is five years for both owner occupiers and investors.

Athena

For variable interest rates, the maximum interest-only period is five years and for fixed rates, it’s three years, for both owner occupiers and investors.

Bank of Queensland

For BoQ the maximum IO period for both owner occupiers and investors is five years.

Bankwest

Bankwest’s maximum interest-only period for owner occupier home loans is five years, and for investor loans it’s 10 years, “subject to full serviceability assessment”.

Bendigo and Adelaide Bank

Both banks feature a maximum IO period of five years for owner occupiers and investors.

Citi

The IO repayment option has an initial period of up to 5 years where the loan is for “non-owner-occupied purposes”.

The IO repayment option may be available on request where the loan is for an owner-occupied purpose. The IO period may be extended on request, subject to approval by Citi.

Gateway Bank

Gateway Bank’s maximum interest-only period for both owner occupied and investor home loans is five years.

Greater Bank

Greater Bank’s initial maximum IO period for variable rate loans is five years, however both owner occupiers and investors can apply for an additional five years.

For fixed loans, the maximum IO period corresponds with the selected fixed loan term.

Great Southern Bank

The maximum IO period for owner occupiers is three years, and five years for investors. For construction loans (both investor and owner occupier) it’s 12 months.

Heritage Bank

Heritage does not offer interest-only loans for owner occupiers, but the maximum period for investors is five years.

HSBC

HSBC has a maximum IO period of five years for investors, and three years for owner occupiers.

homeloans.com.au

For owner occupiers the maximum IO period is five years, while for investors it’s 10.

ING

ING's interest-only terms are typically 1-5 years, however can be extended up to five years for owner occupiers and 10 for investors, subject to re-assessment.

loans.com.au

The maximum IO period for new lending is five years, for both owner occupiers and investors.

Macquarie Bank

Macquarie’s interest-only period is a maximum initial period of five years and can be extended by a further five years “subject to a full credit assessment” and approval, and must not exceed a total of 10 years from the original settlement date. This applies for both owner occupiers and investors.

ME Bank

For ME Bank the maximum IO period for both owner occupiers and investors is five years.

Nano

Nano’s maximum interest-only period is five years and applies to both owner occupier and investor home loans.

Newcastle Permanent

Newcastle Permanent’s maximum IO period for both owner occupiers and investors is five years.

People’s Choice Credit Union

There are a couple caveats with People’s Choice’s IO periods. The initial interest-only period is up to a maximum of five years. However, on review, a further five year term can be offered up to an overall maximum of 10 years.

This interest-only term is the same for owner occupied and investment loans. However, interest-only terms for owner occupied loans are used only for construction purposes or bridging finance.

Suncorp

For Suncorp the maximum IO period for owner occupiers is five years, and for investors 10.

Teachers Mutual Bank

The maximum term for an interest-only loan is five years. This policy applies to both owner occupiers and investors of Teachers Mutual Bank, Health Professionals Bank, Firefighters Mutual Bank and UniBank.

Tiimely

All IO loans have a maximum period of five years. However, on IO loans the maximum total loan term is 25 years, as opposed to loans paying P&I which are 30 years.

Tiimely says less than 3% of its settled loans pay interest-only, the majority being for investors.

UBank

UBank allows up to five years IO for owner occupiers, and 10 years for investors.

Virgin Money

For Virgin Money, the maximum IO period for both owner occupiers and investors is five years.

WLTH

Non-bank lender WLTH’s maximum IO period breakdown is as follows:

• 5 years for owner occupiers at 80% LVR or less

• 5 years for investors at 80% LVR or less

• 3 years for investors >80% LVR

Yard

Non-bank lender Yard has a maximum IO period of five years, applicable for both owner occupiers and investors.

Popularity of interest-only home loans

Interest-only loans now make up a relatively small portion of lending in Australia. Full-year results from Australia’s largest bank, Commonwealth Bank, showed interest-only home loans made up just 12% of its $516 billion total home loan portfolio in June 2021, down from 15% of $498 billion in December 2020, and 16% of $485 billion in June 2020.

In 2017, the Australian Prudential Regulation Authority (APRA) placed limitations on the amount of IO loans banks can provide new customers. Interest-only loans could amount to only 30% of new residential loans, with tough restrictions on IO loans to customers over 80% LVR. However APRA removed this rule in late 2018. Prior to the crackdown, ‘IO’ loans made up nearly 40% of the mortgage market, according to the Reserve Bank, with 23% of owner occupiers taking out IO loans, and nearly two-thirds of investors. Even with restrictions eased, IO loans make up a small portion of the market.

Pros of a longer interest-only period

• Lower repayments: You’ve just paid stamp duty, conveyancing fees and a deposit - chances are you’re feeling the pinch a bit. Interest-only payments lower your mortgage repayments while you find your feet, or find tenants if an investor.

• Tax considerations for investors: Investors can claim a number of items on their investment property, including mortgage interest against their total income. By choosing an IO loan and claiming expenses, chances are you could spend near zero on mortgage repayments as an investor for a few years.

• Realise capital growth: If you’re looking to sell a few years down the track, given the way Australian property prices have gone, you could realise strong capital growth while paying IO and keeping that cash you’d have paid on the principal for other expenses. Then when it comes time to sell you can pay off the loan in full. Of course, capital growth isn’t guaranteed.

Cons of a longer interest-only period

• Don’t chip away at principal: You’re not actually chipping away at the home’s value - only treading water paying interest every fortnight or month, and hence not building any equity this way.

• Higher interest rates: Recent RBA data shows the average interest rate on outstanding owner occupier IO loans is 4.11% p.a., while for investors it’s 4.29% p.a. - this is much higher than loans paying principal & interest.

• High revert rates: After the IO period ends, you might be automatically placed on what’s called a ‘revert rate’, which is often much higher than a bank’s discounted variable rate. You can refinance, but you’ll have to be diligent.

• Bigger deposits required: IO loans often require a larger deposit to account for the additional risks and equity concerns. Often IO loans require a minimum 20% deposit, and sometimes up to 40%.

• Capital growth concerns: The risk with IO loans is that capital growth isn’t guaranteed. If property prices head south and you haven’t built any equity (as you would by paying the principal), you could be in a bit of pain if it comes time to sell.

In the interest of full disclosure, loans.com.au and savings.com.au are both part of the Firstmac Group.

Photo by Mila Mulder on Unsplash

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