What is an interest-only mortgage?
With an interest-only mortgage, you only pay the interest on the loan each month — you don't pay down any of the principal. This means your monthly payments are lower, but your loan balance stays the same. After the interest-only period (typically 1–5 years), you switch to principal and interest repayments.
How repayments compare
On a $500,000 loan at 5.50%:
| Repayment Type | Monthly Payment | Principal Reduction |
|---|---|---|
| Interest-only | $2,292 | $0 |
| Principal + interest (30 years) | $2,839 | ~$547/month initially |
That's a $547/month difference — but remember, with interest-only, you're not building any equity through repayments.
Who uses interest-only mortgages?
Property investors
This is the most common use case. Investors use interest-only to maximise cash flow and keep costs down while the property (hopefully) appreciates. The full interest payment is also tax-deductible for investment properties (subject to interest deductibility rules).
Short-term buyers
If you plan to sell within a few years (e.g., buying a do-up to renovate and sell), interest-only keeps costs lower during the holding period.
Cash-flow management
Some borrowers use interest-only during periods of reduced income. Understanding how much you can borrow helps you plan for the transition back to P&I (parental leave, starting a business) and switch to principal and interest when their income recovers.
Risks of interest-only
- No equity buildup — you still owe the same amount at the end of the IO period
- Payment shock — when you switch to P&I, repayments jump significantly
- More total interest — you pay more interest over the life of the loan because the principal doesn't reduce
- Harder to refinance — banks scrutinise IO loans more closely. Read our guide on how to refinance for tips on switching
Should you choose interest-only?
Interest-only can be a useful tool in the right circumstances, but it's not for everyone. If you're buying your own home and plan to live there long-term, principal and interest is almost always the better choice.
Compare mortgage rates and products to see which lenders offer interest-only options and at what rates. Use the calculator to model both scenarios.
Frequently asked questions
How does an interest-only mortgage work in New Zealand?
With an interest-only mortgage, you pay only the interest on your loan each month—typically for a set period (1–5 years)—without reducing the principal. After the interest-only period ends, you must switch to a principal and interest (P&I) loan, increasing your repayments significantly.
Who should consider an interest-only mortgage?
Interest-only mortgages suit investment property owners (whose rental income may cover interest costs) and buyers expecting income increases or asset sales in the future. They're typically not recommended for owner-occupiers as the payment shock at the end of the interest-only period can be severe (repayments may jump 30–50%).
What is payment shock and why is it risky?
Payment shock occurs when your interest-only period ends and you start paying principal + interest. If you borrow $400,000 at 6% interest-only ($2,000/month), switching to P&I over the remaining 25 years increases your payment to roughly $2,500–$2,700/month. Failure to prepare financially can lead to defaults.
Can investors deduct interest-only mortgage payments as expenses?
Yes, investors can deduct interest costs from rental income as a tax expense, but only the interest portion—not principal repayments. With interest-only mortgages, 100% of your payment is tax-deductible, making them tax-efficient for investment properties. Consult a tax adviser for your specific situation.
What happens if I can't afford the payments when the interest-only period ends?
If your P&I repayments are unaffordable, you can extend the interest-only period (if your lender allows), refinance to a longer term (increasing interest costs), or sell the property. Plan ahead by calculating expected P&I repayments before committing to an interest-only loan.
Explore interest-only options
Compare interest-only and P&I mortgages to see which structure fits your investment strategy.