Compare interest-only and principal-and-interest repayments.
During an interest-only period you pay only the interest charge, so the balance does not reduce. Repayments are lower, and at the end of the period the loan reverts to principal and interest over the remaining term. Because the same principal now has fewer years to be repaid, the repayment after reversion is higher than it would have been had the loan been principal and interest from the start.
The mistake to avoid is budgeting for the interest-only repayment and being surprised by the reversion. Run both figures before you commit: what you pay now, and what you will pay when the period ends. If the second number does not work in your budget, the structure is doing you a favour today at your own expense later.
Interest only is most commonly used by investors managing cash flow and by borrowers with a genuine, temporary reason for lower repayments — a period of reduced income, or a construction stage. Lenders assess interest-only applications more tightly, and approval is subject to the lender’s assessment.
A calculator gives you a starting figure. What a lender will actually approve depends on your income, expenses, credit history and the property, and it varies between lenders. We compare more than 40 lenders on our panel and will tell you where you genuinely stand — see our home loan, refinancing and car loan services, or the suburb pages for Werribee, Tarneit and Point Cook.
Generally yes, because the balance is not reducing during the interest-only period, so interest accrues on the full amount for longer.
Sometimes, but it requires a new assessment and is not guaranteed. Plan on the basis that it will revert.
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