Interest-Only Loans: A Smart Strategy or a Hidden Cost?

When it comes to structuring your mortgage, there’s no one-size-fits-all approach. One of the most flexible tools available to both homeowners and investors is the interest-only loan. It can offer real benefits, but only if it’s used strategically.

So what exactly is an interest-only loan, and when does it make sense?

What Is an Interest-Only Loan?

An interest-only loan allows you to pay just the interest portion of your mortgage for a set period, without reducing the principal balance.

For example, if you have a $700,000 mortgage at 4.49% (as at 2 November 2025), your repayments might be around $3,640 per month on a principal-and-interest loan.

On an interest-only structure, that drops to roughly $2,620 per month – freeing up around $1,000 of extra cash flow every month.

That difference can be the breathing room many homeowners or investors need in the right circumstances.

How It Works in New Zealand

For owner-occupiers, interest-only terms are usually limited to three to five years. Lenders will want a clear reason for using this structure, such as:

• Managing cash flow while on parental leave or during a temporary income change.
• Bridging between properties, when you’re briefly holding two mortgages.
• Funding renovations or upgrades before refinancing to a standard loan.

For property investors, the flexibility is greater. Some lenders now offer up to ten years of interest-only on investment lending. By keeping repayments lower, investors can maintain stronger cash flow across multiple properties, allowing them to:

• Cover unexpected costs like maintenance or vacancies.
• Reinvest surplus cash into new opportunities.
• Use the tax-deductible interest as part of an efficient investment strategy.

The Pros and Cons

Like any financial tool, interest-only loans have two sides:

The Upside

• Lower repayments free up short-term cash flow.
• Flexibility during income or life-stage changes.
• Strategic leverage for investors growing a portfolio.

 The Downside

• You’re not reducing the loan principal, so your debt remains unchanged.
• You’ll pay more interest overall if you don’t switch later.
• If property values fall, your equity can erode faster.

In short, it’s a tool that can work well – but only when it’s part of a broader financial plan.

When It Makes Sense

An interest-only structure can make a lot of sense if:

• You have temporary financial commitments (e.g. childcare, study, or parental leave).
• You’re renovating or developing, and want to stay liquid.
• You’re investing for capital growth, not immediate debt reduction.

But you need a clear plan for when and how to start repaying principal.

The Bottom Line

Interest-only loans aren’t good or bad, they’re simply a financial tool. Used wisely, they can provide flexibility and stability through different market cycles. Used without a plan, they can slow your progress and cost you more over time.

That’s where advice matters. At The Mortgage Hub, our advisers help you structure your lending to suit your goals, whether that’s cash flow, investment growth, or long-term debt reduction.

If you’re considering an interest-only loan, let’s review your situation and ensure it fits your wider financial strategy.

Our advice is free, with no pressure and no obligation.

Watch the video by MilsMuliaina, where he explains how interest-only loans work – and when they make the most sense.