Home > Home Loans > Interest-Only Fixed Rate Home Loans

Interest-Only Fixed Rate Home Loans

Name: Interest-Only Fixed Rate Home Loans
Creator: Savvy
Published: 2021-03-29T14:39:58+10:30

Purchasing a home? Are you aware of interest-only fixed rate home loans? Savvy is here to inform you of your options.

No obligation. It wont affect your credit score.

Written by , updated on September 21st, 2023

Interest-only fixed rate home loans are often overlooked by home buyers. It’s important to know when you should opt for an interest-only fixed rate home loan and the benefits of doing so. Here we talk through the option of an interest-only fixed rate home loan and what it can do to help your home loan situation!

What is an interest-only fixed rate home loan?

An interest-only home loan is where you pay only the interest on your loan and none of the principal amount you borrowed from the lender. This loan only lasts for a certain period of time – typically one to five years. By paying only interest, you have lower repayments which can be beneficial to specific borrowers.

On top of this, an interest-only fixed rate home loan will allow the borrower to pay interest at a fixed rate through the initial interest-only period on your home loan. As opposed to a standard variable rate, a fixed rate will ensure the borrower is aware of their repayments in advance and can better prepare themselves accordingly.

Why should I choose an interest-only fixed rate home loan?

Whether you’re a first home buyer, property investor or looking to refinance, opting for an interest-only fixed rate home loan might be just the fit for you.

If you’re looking to save money in the short-term, the low repayments of an interest-only fixed rate home loan will suit you. Although you will be facing increased repayments in the long term, reduced repayments in the short term could allow you to use your cash elsewhere. Low repayments could also give you time to improve your cashflow, so you are prepared to meet increased repayments when you eventually switch to a P&I loan.

In addition, an interest-only fixed rate home loan will give you the comfort of financial certainty which a standard variable rate cannot offer. Knowing the cost of your repayments in advance with a fixed interest rate will allow you to plan for the future over the course of the fixed-rate period.

How do I compare interest-only fixed rate home loans?

In comparing interest-only fixed rate home loan options, it is important to keep an eye out for special fixed interest rate offers by lenders on the market.

Furthermore, it is important to check comparison rates in addition to the advertised fixed interest rates by lenders. Although a low advertised interest rate might be appealing at first glance, it doesn’t take into account a loan’s standard fees and charges like a comparison rate will. Certain loans may also charge non-standard costs which won’t be included in these comparison rates. Keep a close eye out and don’t overlook any of the small details!

You should also compare the features which each loan offers. Some loans will offer a low fixed rate at the expense of other features and vice versa. Certain loan features – such as a redraw facility – can help you make extra payments and reduce your debt while increasing equity in the property.

Your home loan options

First home loans

Making your first big step towards buying a home? It's crucial to be across your mortgage options as a first homebuyer.

Variable rate loans

Opting for a variable interest rate on your home loan means it'll fluctuate as the market moves throughout your repayment term.

Fixed rate loans

On the other hand, fixing your rate locks it in for a pre-defined period. This can bring with it greater certainty around your budget.

Home loan refinance

It's important not to set and forget when it comes to your home loan. If you find a more competitive offer, it may be worth refinancing.

Construction loans

If you're looking to build a new house, construction loans are specifically designed to cater to the different needs associated with doing so.

Guarantor loans

A guarantor essentially acts as a safety net for your lender, as they sign onto your loan to agree to pay it off should you become unable to do so.

Investment loans

Purchasing a property as an investment brings with it different specifications from a lender. It's crucial to know what your options are.

Commercial property loans

Businesses big or small may wish to purchase a property for commercial purposes, which are also different from a standard loan.

Interest-only loans

Your home loan may give you an interest-only option, which allows you to exclusively pay interest on your loan for a set period.

Self-employed loans

Just because your finances may be slightly more complicated as a self-employed individual doesn't mean you can't take out a home loan.

Low doc loans

Some lenders may allow you to apply for a home loan with alternative documents, such as tax returns, BAS and ABN registration.

No deposit loans

There are several options for purchasing a property without a cash deposit, such as equity in another property if you or your guarantor own one.

Why compare home loans with Savvy?

100% free

You don't have to pay a cent to compare home loans with us, enabling you to do so at any time.

Paperless quote process

You can fill out a simple online quote via our form without having to worry about sorting through heaps of paperwork.

Trusted lenders

With a panel of reputable mortgage lenders behind us, you can rest assured you'll be comparing high-quality options.

Pros and cons of interest-only fixed rate home loans

Pros

Benefits property investors who can claim the interest paid come tax time.

Fixed interest rate gives you certainty and helps you work out financial future.

Fixed rates are secure and will protect you in the instance of an interest rate rise from lenders.

Allows investors to hold property at a cheap monthly repayment amount as they await an increase in property prices.

Cons

Owner-occupiers who opt for an interest-only fixed rate home loan will be paying interest without paying off any of the principal amount of their loan. At the end of interest-only fixed rate period, repayments will increase substantially and might be a shock to a borrower’s finances if they’re not prepared.

Borrower will not benefit in the instance of interest rate cuts.

Should you look to break from your interest-only fixed rate loan, you may incur significant break fees.

Frequently asked questions about interest-only fixed rate home loans

Is an interest-only fixed rate home loan or a standard interest-only home loan better?

This depends on your situation as each have advantages and disadvantages. An interest-only fixed rate home loan benefits the borrower in preparing them for their repayments. If you are a borrower with limited cashflow who needs to plan their finances in advance, the fixed rate may prove beneficial.

What are some common features of interest-only fixed rate home loans?

Some main features associated with interest-only fixed rate home loans are offset accounts and redraw facilities. An offset account is a transaction account which is linked to directly to your loan while redraw facilities will allow you to access any extra payments you had previously made, but this may come at a cost depending on your lender.

As a property investor will I incur a greater fixed interest rate than that of an owner-occupier?

Yes. Property investors face higher fixed interest rates on their investment home loans than owner-occupiers as lenders are taking on greater risk with an investment home loan.

Is an interest-only fixed rate home loan better suited to a property investor or an owner-occupier?

An interest-only fixed rate home loan can suit either type of borrower depending on the situation. While a property investor may be best benefited by the tax benefits of an interest-only fixed rate home loan, the main benefit to an owner-occupier may be having a fixed interest rate which allows them to plan their finances in advance.

If I choose to change from my interest-only fixed rate home loan during the fixed term, what will happen?

If you go down this path you will likely be charged break fees by your lender. This can end up being a costly process and add significant expense to your home loan.

If interest rates rise or decrease during my fixed-rate period, will I be impacted?

No. One of the advantages of a fixed-rate home loan is that your individual fixed rate will not be impacted by any changes to interest rates. If lenders increase their interest rates, your individual rate and repayments will still remain the same. Likewise, if lenders lower their interest rates, you will be still be tied to the same fixed rate and could potentially be paying more than the market dictates.