How long can I get an interest only mortgage for?

Property investors often use an interest only when getting a mortgage. These loans help keep mortgage repayments low and cashflow better.

But not every investor can get an interest only loan. Just because you want one … doesn’t mean the bank will give you one. In this article, you’ll learn how banks decide whether to give you an interest only mortgage (or not). You'll also learn:

• How long the bank will give you an interest only loan for
• and the strategies you can use to get interest only for longer.

And if you have a question, write your questions or thoughts in the comments section below.

How long will a bank approve interest only for?

When the bank lends you money they eventually want you to pay it back.

That's why Interest only loans are only temporary.

The bank won't give you an interest only loan forever. Generally, the bank will approve an interest only mortgage for up to 5 years.

So once you get to the end of your interest only period, you need to apply for another interest only period.

But each bank has different policies.

For example, TSB only approves interest only loans for a up to 3 years.

ANZ on the other hand will go up to 10 years for investors.

Here are some examples of banks and how long they will give you interest only for:

Most banks will only go up to 5 years interest only for investors.

But this isn’t a given. How long a bank will approve your interest only for depends on you.

How do banks calculate whether I can afford interest only?

Banks will first do a sense check before running the numbers to see if you can afford interest only.

The first thing they'll look at is whether interest only is right for you.

A 45-year old purchasing an investment property? Yup that could make sense.

A 64 year old looking for interest only on their owner occupier? That doesn't make as much sense.

If interest only is suitable for you, next they'll see if you can afford this type of loan.

When you take out a mortgage, you have a 30 years to pay it off.

But if you are applying for an interest only loan, it's a bit different.

You may get 5 years’ of interest only repayments. But, then once that's up you have 25 years of principal-and-interest.

But remember, you won’t have been paying down the total loan amount in that first 5 years.

So, at the end of that 5 years, you’ve got a full 30-years worth of mortgage waiting for you. but now you only have 25 years to pay it off.

So, before the bank approves you for 5-years interest only first they ask:

“Will this borrower be able to repay the rest of their loan in 25 years?”

For example, the bank tests your mortgage at 9%.

You apply for a $650,000 loan on a 30-year term paying principal and interest.

The bank will test to see if you can afford repayments of $5,230 a month.

But when they test you for the same loan on interest only, they will see if you can afford higher repayments.

This is because it is now judged by whether you can afford the same loan over 25 years.

In this case, your repayments have risen to $5,450 a month.

So you’ll need to prove to the bank you have an extra $220 a month before they approve your interest only period.

"Why Did The Bank Only Approve Me for 2 Years Interest Only?"

While many banks can lend you interest only for up to 5 years, that doesn't always happen.

Some investors we work with here at Opes Partners get worried when the bank only approves them for 2 or 3 years.

They might ask “what’s going on here?”

This happens when the bank thinks you can’t afford to pay off your mortgage over 25-years.

They then ask themselves "well could this investor afford to pay it off over 26 or 28 years?"

They keep reducing the repayment term until they can give you a "yes".

If the bank approved you for 2 years interest only, they think you can only afford to pay back the loan in 28 years.

More from Opes:

• Interest only mortgage calculator & guide to interest-only mortgages (Article)
• Why do investors use interest-only loans? (Article)
• Calculate your mortgage repayments (Calculator)

What happens at the end of the interest only period?

At the end of your interest only period, you switch to principal-and-interest payments.

That's unless you apply to extend it. That's what many investors do.

So, the next step is to apply to extend your interest only loan period.

But as you keep doing this it gets more and more difficult.

That's because the bank tests your income to see if you can afford to pay off the loan in the remaining period.

Let's say you apply for another 5-year interest only period. So you get 10 years interest only in total.

The bank will test to see if you can repay the mortgage over 20 years.

This means they'll see if you can afford to pay $5,850 a month. That's using the same numbers as before.

Do the same thing 5 years later, and they'll see if you can afford to pay that mortgage off over 15 years.

This starts to get tricky from an income perspective. So your interest only extension might not get approved.

It can be harder to renew your interest-only loan in 2024

Some investors get stuck when they renew their interest-only loan.

When you renew your interest-only loan, you must go through a full mortgage application process. But property values have declined, so you might not have enough equity (deposit) to re-qualify for interest-only.

Here’s an example. A couple of months ago, Jo got a call from ANZ. She wanted to renew her interest-only mortgage.

But house prices have dropped significantly and Jo’s investment property went down in value by $100k; her own home dropped in value by $90k.

This didn’t worry Jo. After all, she’s a long-term investor and she knows property prices go up and down.

But, because she didn’t have 20% equity (deposit) in both properties she couldn’t renew her interest-only loan.

At this point, Jo had just finished a kitchen renovation. So, she paid $900 to get a property valuer to revalue her house. The thought was that if her house value had risen enough, she might get an interest-only loan.

But the value of her house hadn’t gone up enough to account for the falling property market.

As a result, her loan switched to principal and interest. Her mortgage repayments rose by $130 a week.

The good news is that this extra $130 will go towards paying down debt, so she’s still getting ahead. It’s not a waste of $130 a week, but it’s still an extra $130 a week she has to find.

This is a good reminder that property and finance have lots of moving parts. These kinds of things can happen. Your interest-only mortgage won’t always be renewed.

Strategies to extend your interest only period for as long as possible?

Now, you might be asking: “Well, the bank only approved me interest only for 2 years. If I can’t afford 5-years now, what hope will I have of getting it extended in the future?”

Firstly, your financial situation may improve over the next few years.

For instance:

• Your income may have increased. That could be from the rent on your investment property or your salary.
• Your debt might have gone down. You may have paid off credit cards or a car loan
• Your expenses may have gone down. For example, your child may have stopped going to daycare and started going to school. This often saves a lot of money.

Either way, usually your financial situation improves over time.

But There are other strategies too:

#1 – Extend the length of your mortgage term

You can ask your current lender to extend your mortgage back out to 30-year. This gives you more time to pay it off.

This way, your repayments aren't calculated as if you're paying off the lona on a shortened loan term.

For instance, ANZ has recently updated its policy surrounding interest-only loan extensions.

When you ask to extend for another 5 years, the bank automatically extends the loan term back out to 30-years.

So, instead of looking if you can pay off your loan in 20 years (10-years interest only), they keep assessing it at 25 years.

It’s still a new policy. But, our mortgage advisers say it makes it easier to extend your interest only period.

You don't have to do this at ANZ though. You can do this at any bank.

#2 – Try a different bank

If your bank doesn’t give you the answer you want, you can try your luck with another bank.

There’s no rule that says you have to stick to one bank.

As mentioned, different banks have different policies around interest only loans.

Just because one bank turns you down for an interest only loan doesn't mean you can’t get it from another bank.

#3 – Opt for a non bank

Another option is considering a non-bank lender.

Some non-bank lenders will give you interest only for longer.

For instance, Resimac (a big non-bank lenders in NZ) has the Specialist Investment Loan.

This lets investors go up to 10 years interest-only.

There is some criteria for this. Not everyone can get it.

For example you can only get interest only up to a 50% LVR. So if you have a $1 million property they'll only give you up to $500,000 interest only.

The rest will be on a principal and interest mortgage.

You'll also need to pay a higher interest rate (9.34% at the time of writing).

But for some investors, this may be the right fit for them.

What if none of these strategies work and I can’t get another interest only loan?

If all else fails, the worst case scenario is to switch to principal and interest payments.

That's once your interest only period runs out.

(Though that's probably not what you wanted to hear).

But that is the default option and the risk you take when opting for an interest only loan.

Yes, interest only loans are great for investors to have the extra cash flow.

But if it isn’t approved you are still paying down debt that will eventually make its way back into your pocket.

Your borrowing power will increase too.

That said, most of our investors here at Opes use interest only loans.

In our experience, if you ask for it in the right way, you will likely get it approved. And will keep getting approved.