Interest-only loans hit eight-year high fuelled by property investors

Interest-only lending for Australian home loans has hit an eight-year high of over a fifth of total lending commitments, mostly fuelled by a surge of investors.

To a lesser extent, the jump in interest-only (IO) lending has also come from cash-strapped first home buyers eager to get a foot on the property ladder.

“It does generally reflect the increase of investor activity over the last couple of years,” said Gerard Burg, Cotality head of research, citing Australian Prudential Regulation Authority (APRA) figures showing 21.2 per cent of home loans were interest-only in the December 2025 quarter.

“That’s significantly up from the low point six years ago of 17.5 per cent,” he said.

“But back then, investors only made up 27.9 per cent of the value of home lending, whereas in March this year, that figure was 40.3 per cent. But with the changes in the federal budget to negative gearing, we would expect investor activity to be weaker and for the number of interest-only loans to ease back a bit.”

The 2026 federal budget confirmed plans to curb negative gearing and limit the capital gains tax discount to new build properties. Some experts think these moves may make property investing less attractive.

The last time the IO share was higher than December 2025 was in June 2017 when it was 30.5 per cent, APRA date shows.

Owner-occupiers tend to be attracted to IO loans when interest rates rise and house prices climb and, as a result, they now make up part of the total.

“It’s when servicing a principal-and-interest (P&I) loan becomes more difficult that they turn to this,” said Dr Shane Oliver, AMP’s chief economist.

“Borrowers come to the view that it’s better to get a foot in the door sooner rather than later, when prices will have gone up by more.

“A decade ago, these loans were frowned upon and considered risky, but with a more expensive property market and higher interest rates, they’ve come back into favour.”

Home buyers with IO loans have to pay off just the interest for typically the first five to 10 years until repayments for the main loan kick in. A P&I loan requires the balance to be paid down from the start.

As the IO loan proves more expensive in the long run – with Canstar showing an estimated average variable rate of 7.11 per cent for new IO owner-occupier loans versus 6.17 per cent for new P&I owner-occupier loans – it’s more of a favourite among investors who can negatively gear their property, offsetting the cost against property income to claim deductions in their income tax.

Latest Australian Taxation Office data for 2022-2023 shows about 1.2 million investment properties across the country were negatively geared, roughly half all investment properties in Australia.

But the number of IO loans still lags the historical record figure of 45.6 per cent in 2015, which triggered a dramatic credit squeeze from APRA, with a 30 per cent limit on new IO lending in 2017.

That, together with the banking royal commission established the same year and then COVID in 2020, led to a huge drop in investor numbers until property prices began rising again and they returned to the market en masse.

“Interest-only loans are less attractive to first home owner-occupier buyers because some of the schemes and benefits they can apply for, like the government’s 5 per cent deposit scheme, are only available for P&I loans,” said independent housing analyst Eliza Owen.

“And with the changes in negative gearing, the number of investors and interest-only loans are likely to fall – unless there’s a huge uptake in new build investment where they’ll still be able to claim negative gearing.”

Herron Todd White chief economist Cameron Kusher said only 9.4 per cent of owner-occupiers, according to calculations based on APRA’s statistics for December 2025, take out interest-only loans, while 41.6 per cent of investors favour them.

As well as helping owner-occupiers who might be feeling a little hard up, they can sometimes be taken out by them in the short term too, said Ari Bernstein of mortgage brokers Intelligent Finance, if they’re expecting pay bonuses or lump sums from their businesses to convert initial IO to P&I.

“Another strategy is having an offset account against the loan to reduce the interest,” Bernstein said. “In a high-cost environment where the cost of living is going up that can be a smart move.

“An interest-only loan gives you cash flow while you’re repaying an asset that’s going up in value.”

The budget, however, is likely to stop the rise in IO loans and depress their numbers further.

“They will potentially decrease because there will be less negative gearing,” said Kusher. “We’re likely to see fewer investors as a result of that too.”

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