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Understanding principal and interest and interest only payments

Repayment types explained

Generally, when you make a loan repayment, your repayment pays down some of the principal balance as well as the interest accrued. This is known as principal and interest repayment.

However, you may be able to choose to make interest only payments for a specific period, so you’re only paying interest charged. This means your payments during that period will be lower than principal and interest repayments. Because you eventually have to repay the principal balance, this interest only periods is always limited. 

You need to consider your financial situation to plan for the end of your interest only period, when you switch to principal and interest repayments, as your repayment amount will be higher.


Differences between repayments

Principal and interest repayments

  • This means you will be paying down your principal balance (as well as interest it accrues) from your first repayment.
  • You could pay less interest over the life of the loan as your principal balance will be reduced by each repayment.
  • Generally have lower interest rates, but as interest rates can change, it's important to check the current interest rates on loan products before making a loan application or accepting a loan offered by ANZ. 

Interest only payments

  • You're not reducing the principal balance which interest continues to be calculated on during this period. This may mean paying more interest over the life of the loan.
  • Your minimum payments will be lower during the interest only period as you're not repaying the principal balance.
  • When your interest only period ends your repayments are likely to be higher, as you’ll need to start paying more in order to pay back the principal balance and interest, within the term initially set for your loan.
  • Interest only payments may better suit some customers' investment objectives, taking into account their particular tax and investment arrangements.

Let’s look at an example of two different home buyers’ journeys, where one chooses interest only payments as part of repaying her loan and the other chooses to make principal and interest repayments throughout her home loan term.

The calculations below are based on an interest rate of 5% per annum for principal and interest, and 5.55% per annum for interest only. These are just example rates and the calculations for a particular customer will change depending on the actual interest rate for their home loan.

Rates may change from time to time. Find out more about ANZ’s current home loan interest rates.

Let’s look at an example

Let’s assume you’ve borrowed $500,000 on a 30-year variable loan to buy your home to live in with a 5 year interest only period. Here’s a comparison of what your monthly repayments may look like in the scenarios below:

Repayments for years 1 to 5

Years 1 - 5

Scenario 1

Principal and interest

Years 1 - 5

Scenario 2

Interest only

Years 1 - 5

Interest rate

5.00% p.a.

5.55% p.a.

Estimated monthly repayments (1)



Difference in monthly repayments




Changes in repayments after interest only period ends

Year 6 onwards after the interest only period ends

Principal and interest

Years 6 - 30

Principal and interest

Years 6 - 30

Interest rate

5.00% p.a.

5.36% p.a.

Estimated monthly repayments (2)



Increase in monthly repayments after interest only period ends (2) - (1)




Repayments over 30 year loan term

Over the 30 year loan term

Scenario 1

Scenario 2

Total interest paid



Additional interest charges with interest only repayments



As you can see in this example, for the first 5 years during the interest only period, your repayments might be lower. But from year 6, after the interest only period ends and your repayments switch to principal and interest, your monthly repayments increase. Also, the total amount of interest you pay over the life of the loan will actually be higher compared to a loan with principal and interest repayments.

Repayments calculator

Estimate the impact of switching loan type for your situation.

Try it out

When your interest only loan comes to an end

When the interest only period expires, your repayments will change to principal and interest. This usually means your repayment amount will increase as you will now be repaying principal as well as paying interest on your loan. We’ll remind you a few months before the expiry to help you prepare for the new repayment. However, it may be possible to extend your interest only period. If you’d like to do that, you need to contact us to make an application. Following an assessment of your application, you’ll be advised whether ANZ agrees to extend your interest only period. This application process may take up to four weeks so please make sure you allow enough time before the interest only period expires.

We're here to help

Switch repayment type

To discuss switching from interest only to principal and interest repayments now, call the ANZ Home Owner Direct team on 1800 035 500 Monday to Friday – 8am to 8pm. 

Please note; if you switch from, or break, a fixed rate home loan before the end of the fixed term, you may incur an early repayment cost. 

Extend your interest only period

To extend your interest only period you’ll need to contact us to make an application.  This will require updated information such as your current income and expenditure. Following an assessment of your application, you’ll be advised if ANZ agrees to extend your interest only period.

To complete this process may take up to four weeks so, if you would like to extend your interest only period, please allow sufficient time before your interest only period expires.

Discuss your options

We’re here to help. For any additional information, please contact your lender, visit your local ANZ branch or call our dedicated Home Owner Direct team on 1800 035 500 Monday to Friday – 8am to 8pm.

If you are having financial difficulty which is impacting your ability to make your loan repayments, you can find out more about our options for your circumstance.

This is general information only and does not constitute tax advice. We recommend you obtain independent  advice from a financial planner and/or registered tax agent if you are considering the right repayment type for you or purchasing an investment property.

Applications for credit are subject to ANZ’s credit approval criteria. Terms and conditions, and fees and charges apply. Australian credit licence number 234527.