Interest-only home loans: what they cost and what happens after

With an interest-only loan your repayments cover just the interest, so you owe exactly the same at the end of the interest-only period as at the start. On a $600,000 loan at 5.06% (the average one-year fixed rate, rates as at 10 November 2026), interest only is $2,530.00 a month, against $3,242.97 for a 30-year table loan. The catch comes later. After 5 years of interest only, the full $600,000 has to be repaid over the 25 years left, so the repayment jumps to $3,528.55, and the loan costs about $42,896 more interest in total than repaying principal from day one. Interest only can be a useful tool for a set period, especially for investors, but it is a deferral, not a saving.

How interest-only repayments work

ASB puts it simply: with interest only, "each of your payments will only cover the interest costs calculated on your outstanding principal balance". Nothing goes off the loan. The repayment is the balance times the rate, divided by the number of repayments a year:

Some points worth knowing:

• It is for a set period. Interest only is normally agreed for a number of years, after which the loan switches to principal and interest. Sorted's mortgage calculator lets you model an interest-only period of 0 to 5 years; that is the tool's range, and we have not confirmed it as a limit at every bank.
• Not everyone qualifies. ASB says interest only is available only to customers who meet specific lending criteria.
• Monthly amounts can vary. Since 5 May 2024, BNZ charges interest on the actual number of days in each repayment period, and says interest-only repayments now vary with the length of the month. On our example that is about $2,328.99 for a 28-day month, $2,495.34 for 30 days and $2,578.52 for 31 days, against $2,530.00 on an even twelfth of a year. See how banks calculate interest.
• Extra repayments may be limited. Sorted's tool notes "You can't top up your repayments while paying interest only." Check your own loan terms.

What interest only costs: worked example

Here is a $600,000 loan with a 30-year term, monthly repayments, at 5.06% for the whole term, with no interest-only period, 2 years and 5 years of interest only.

Two things drive the extra cost:

• You owe more for longer. After 5 years on a table loan, the balance would be $551,439. On interest only it is still $600,000, and interest keeps being charged on that higher balance.
• The principal is squeezed into fewer years. The same $600,000 now has to be repaid over 25 years instead of 30, which lifts the repayment.

Over 5 years of interest only you pay $151,800 and your balance does not move. On the table loan you pay $194,578 over the same 5 years and owe $48,561 less. Our interest-only calculator runs these figures for your own loan, rate and period.

Why investors often use interest only

Interest only is more common on rental property than on owner-occupied homes. The usual reasons:

• Cash flow. A lower repayment can help rent cover the outgoings while the property is held.
• Tax. Interest on a residential rental is a deductible expense against rental income. Inland Revenue says you can claim 100% of interest on funds borrowed for a residential rental from 1 April 2025 (80% for the 2024/25 year). Principal repayments are not deductible. Rental deductions are ring-fenced, so losses generally carry forward against future rental income rather than reducing other income.
• Paying down the home first. Some investors keep the rental on interest only and put spare money off their own home loan, where interest is not deductible.

Whether any of this makes sense depends on your whole situation, including tax. This guide is general information, not financial advice, and not tax advice either. Talk to an adviser or accountant before choosing a structure. The main risk for investors is the same as for anyone: if the property's value falls, an interest-only loan has built no equity to absorb it.

Owner-occupiers

For a home, interest only is usually a short-term measure: a few months of lower repayments during parental leave, a renovation, or a drop in income. If you are in financial difficulty, talk to your bank early; our mortgage hardship guide covers the options banks commonly offer.

What happens when the interest-only period ends

At the end of the agreed period the loan switches to principal and interest. The bank recalculates the repayment on the full balance over the years left in the term, at whatever rate applies then. That step up can be large:

• After 2 years: from $2,530.00 to $3,343.08 a month, a rise of $813.08.
• After 5 years: from $2,530.00 to $3,528.55 a month, a rise of $998.55.

Those figures assume the rate is still 5.06%. If the loan is floating, or the fixed term ends at the same time, the new rate could be different in either direction. At the average floating rate of 6.31% (rates as at 10 November 2026), 5 years of interest only would be $3,155.00 a month, rising to $3,980.30 when principal and interest start.

Before the period ends, it pays to:

• Know the date and the new repayment. Ask the bank, or run the figures on the interest-only calculator.
• Decide whether to extend. Ask whether your bank will consider a further interest-only period. Do not assume it will be approved; plan for the higher repayment.
• Think about the term. If the jump is too large, you could ask about a longer remaining term, which lowers the repayment but adds interest. See mortgage term length.
• Line it up with a refix. If a fixed term ends around the same time, our refixing guide covers your options, including splitting the loan so part is on interest only and part on principal and interest, where your bank allows it.

Interest only on part of the loan

Interest only does not have to cover the whole mortgage. Where a bank offers it, one part of a split loan can be on interest only while the rest repays principal and interest. That lowers the total repayment by less, but keeps most of the loan shrinking.

The maths is the same for each part: the interest-only part costs its balance times its rate, divided by repayments a year, and its balance stays the same; the other parts follow the table loan formula. When the interest-only period ends, only that part's repayment steps up. Our interest-only calculator works one loan at a time, so run each part separately and add them up.

Questions to ask before going interest only

• How long is the interest-only period, and what happens at the end?
• What will my repayment be when principal and interest start, at today's rate and at a higher rate?
• Can I make extra repayments during the interest-only period?
• Does interest only change the rate or fees on my loan?
• Will my balance still be comfortably below the property's value if prices fall?

Rates as at 10 November 2026, the average of the five main banks' lowest advertised rates in the interest.co.nz table. Check current rates on our mortgage rates page.

Questions people ask

How much is an interest-only repayment?

The balance times the rate, divided by repayments a year. On $600,000 at 5.06% that is $2,530.00 a month, $1,167.69 a fortnight or $583.85 a week. Banks that charge actual days will vary the monthly figure with the length of the month.

Does interest only cost more overall?

Yes. You owe more for longer, and the principal is repaid over fewer years. On $600,000 over 30 years at 5.06%, 5 years of interest only adds about $42,896 of interest compared with a table loan from the start.

What happens when my interest-only period ends?

The loan becomes principal and interest, and the bank recalculates the repayment on the full balance over the years left. After 5 years on our example, the repayment rises from $2,530.00 to $3,528.55 a month at the same rate.

Can I pay extra during an interest-only period?

It depends on the loan. Sorted's calculator notes that you can't top up repayments while paying interest only. Some loans may allow extra payments, especially on a floating rate. Ask your bank before you rely on it.

Can I get interest only on my home?

Some banks offer it to owner-occupiers who meet their criteria, often for a short period. ASB, for example, says interest only is available only to customers who meet specific lending criteria. Ask your bank.