The first repayment can make an interest-only loan look comfortable. The more revealing number is the repayment when that period ends.
If you have paid only interest, the original debt is still there. You then have fewer years left to repay it. Even with no rate rise, the monthly commitment can jump.
Before choosing interest only, ask for both repayment figures and the total cost. If the later figure does not fit your household or investment budget, a lower initial payment has postponed the problem.
What happens to a $600,000 loan?
Consider a hypothetical $600,000 mortgage over 30 years at a constant 6% annual interest rate. Assume monthly payments, interest calculated at 6% divided by 12, no fees, no offset and no extra repayments. This is an illustration, not a current loan offer.
With principal and interest from the start, the monthly repayment is about $3,597. After five years, the balance is about $558,326.
With five years of interest only, the monthly payment is $3,000 for those first five years. The balance is still $600,000. Paying that off over the remaining 25 years requires about $3,866 a month at the same assumed rate.
That is an increase of about $866 a month when interest only ends. Over the full 30 years, the interest-only arrangement costs about $44,713 more in interest than starting principal and interest immediately, under these identical-rate assumptions.
Actual repayments depend on the contract, daily interest calculations, payment dates and changing rates. An interest-only rate may also differ from a principal-and-interest rate. The example isolates the effect of delaying principal repayments; your quote needs to show the real pricing as well.
Buying time has a price
There may be a clear reason to retain cash for a period. The question is what changes before the higher repayment begins. A temporary, documented income change is a different proposition from a budget that needs the lowest payment indefinitely.
Moneysmart's interest-only guide stresses checking the repayment after the initial period and leaving room for higher rates. Build that later figure into your own budget now. If you cannot set aside the difference today, identify the evidence behind any expectation that it will be easier later.
For a business owner, that means looking beyond the best trading month. Our variable business income guide helps put seasonal income beside fixed household commitments.
Compare actual products and the changeover
Athena's Interest Only range advertises variable interest-only periods of one to five years, with principal-and-interest repayments afterwards. It is worth investigating if your evidence fits the relevant Athena product and you have a defined reason for the temporary lower payment. Ask for the cost of the initial period and the repayment at the changeover, not just the introductory cash saving.
For self-employed applicants who need alternative income verification, Brighten Boss Alt Doc also lists interest-only repayments for up to five years, reverting to principal and interest for the remaining term. That gives you a route to investigate where documentation matters. It is not a reason to choose interest only if principal and interest would better suit your budget.
For either comparison, use the same loan amount and total term. Ask how an offset or extra repayments affect the balance and the required payment. Do not assume that available redraw will always remain an emergency reserve on unchanged terms.
Do not budget on an extension
A further interest-only period or a refinance is not something to count on. Another assessment may be needed, and your income, property value or available products may have changed. Our self-employed refinance guide explains the evidence and costs to revisit.
Extending the overall repayment term is also a separate decision, explored in our 40-year home loan comparison. A smaller payment can carry a larger lifetime cost.
Before accepting a loan, obtain a repayment schedule showing the interest-only end date, the remaining term and the later payment at both the quoted rate and a higher rate you want to test. If you already have the loan, request those figures before the changeover. Choose the initial relief only when you can explain how the later obligation will be met.