Interest-Only Mortgages Australia 2025: Trends, Risks & Strategies

With property prices stabilising and lenders competing for new business, interest-only mortgages are back in the headlines for Australian borrowers in 2025. Whether you’re a first-home buyer, property investor, or considering refinancing, understanding the mechanics and implications of interest-only loans is crucial to making a sound financial move.

How Do Interest-Only Mortgages Work in 2025?

Interest-only mortgages allow you to pay just the interest on your loan for a set period—usually up to five years—before switching to principal and interest repayments. In 2025, these loans are making a comeback as some lenders relax restrictions imposed after the 2017-2019 clampdowns.

• Lower initial repayments: Borrowers pay less during the interest-only phase, freeing up cash flow for other investments or expenses.

• Principal remains unchanged: Unlike standard home loans, your debt does not reduce during the interest-only period.

• Switch to principal & interest: After the interest-only phase, repayments rise sharply as you start paying off the principal.

For example, on a $600,000 mortgage at 6.2% interest, an interest-only payment is around $3,100 per month, compared to $3,700 if principal and interest are paid. This gap can provide short-term relief, but the total interest paid over the loan term is higher.

2025 Lending Landscape: Policy Updates and Lender Criteria

After years of regulatory scrutiny, APRA (the Australian Prudential Regulation Authority) eased some restrictions on interest-only loans in late 2024. As a result, the share of new interest-only loans has crept up to around 16% of new lending, according to the most recent RBA data. However, lenders remain cautious:

• Stricter assessment rates: Banks now test borrowers’ ability to repay at higher interest rates, factoring in the switch to principal and interest.

• Loan-to-value ratios (LVRs): Many lenders cap LVRs for interest-only loans at 80%, making it harder to borrow with a small deposit.

• Investor focus: Interest-only loans remain popular among property investors seeking to maximise negative gearing benefits, but owner-occupiers can still access them in 2025 with strong applications.

• Offset and redraw features: Some lenders offer offset accounts on interest-only loans, providing flexibility to manage repayments and reduce interest.

In 2025, digital lenders and some mutual banks are re-entering the market with competitive fixed-rate interest-only offers, particularly targeting investors in capital cities like Sydney, Melbourne, and Brisbane.

The Risks and Rewards: Is an Interest-Only Loan Right for You?

Interest-only mortgages offer flexibility but are not without pitfalls, especially in a market where rates remain elevated and property values are steady.

• Repayment shock: When the interest-only period ends, repayments can jump by 30-40%. Borrowers must plan ahead to avoid financial stress.

• Equity risk: With no principal reduction, your equity only grows if the property’s value rises. If prices fall, you could end up owing more than the property is worth.

• Long-term cost: Total interest paid over the loan’s life is significantly higher than with a principal and interest loan.

• Refinancing hurdles: Tighter lending standards make it harder to refinance an interest-only loan, especially if your income or property value drops.

That said, there are scenarios where interest-only loans make sense:

• Investors: Looking to maximise cash flow and tax deductions while planning to sell or refinance before the interest-only period ends.

• Short-term cash flow needs: Borrowers anticipating higher income or a lump sum (e.g., from a bonus or inheritance) in the near future.

• Renovators and upgraders: Those planning to renovate or upgrade within a few years, who don’t want to tie up cash in repayments.

Smart Strategies for 2025 Borrowers

To make the most of an interest-only mortgage in 2025, consider these expert moves:

• Build an exit plan: Know when the interest-only phase ends and prepare for higher repayments, whether through refinancing or budgeting.

• Use offset accounts: Park extra savings in an offset to reduce interest without locking yourself into higher repayments.

• Monitor property values: Stay alert to market changes—if your equity drops, refinancing options may narrow.

• Make extra repayments: Even during the interest-only phase, voluntary repayments can chip away at the principal if your loan allows it.

• Consult your accountant: Especially for investors, understanding the tax impact of interest-only borrowing in 2025’s policy environment is essential.

With careful planning and an eye on the latest lender policies, interest-only loans can be a useful tool rather than a financial trap.