What is an interest-only loan?

An interest-only (IO) home loan is a lending arrangement where you only repay the interest on the amount you have borrowed for a set period of time. You don’t have to repay the principal (the loan amount) during that period, like you would with a principal and interest (P&I) loan.

During the interest-only period your repayments would be lower, but would go up once you start paying off the principal component of the loan.

Some people might see an interest-only home loan as an attractive choice when considering finance options for a property. The prospect of lower repayments for a period of time to free up cash for other purposes might be appealing, it’s worth bearing in mind, though, that as well as the potential plusses, this setup can have drawbacks, most notably the potentially greater long-term cost compared to other options. If you’re considering an interest-only home loan, it’s important to do your research so you understand what you’re committing to.