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Interest-Only Mortgages in NZ: What They Cost and When They Make Sense
An interest-only mortgage lets you pay just the interest on your loan for a set period — typically 2 to 5 years — without paying down what you borrowed. Your monthly repayments are lower. Your loan balance stays exactly where it started. It sounds like a useful option. For some borrowers, it is. But the cost over the life of the loan is higher than most people realise, and the repayment jump when the interest-only period ends can catch people off guard. Here's what the numbers actually look like.
How interest-only repayments work
On a standard mortgage, each repayment covers two things: the interest that accrued that month, plus a slice of the principal — the amount you borrowed. Over time, the principal reduces, and so does the interest. Your balance eventually reaches zero.
On an interest-only mortgage, your repayment covers only the interest. The principal doesn't reduce at all. After two years of interest-only payments, you still owe exactly what you borrowed on day one.
On a $750,000 mortgage at 5.5%:
| Monthly repayment | What it covers | |
|---|---|---|
| Standard P+I (25 years) | $4,606 | Interest + principal |
| Interest-only | $3,438 | Interest only |
| Monthly saving | $1,168 | — |
The $1,168 monthly saving is real and meaningful — particularly if you're building a home and drawing down your loan progressively, going through a period of reduced income, or simply managing cashflow during a tight stretch.
The cost of choosing interest-only
The saving during the interest-only period comes at a cost later. Because you haven't reduced the principal at all, when you switch to principal and interest you're paying off the full $750,000 in a shorter remaining term — which means higher repayments.
2-year interest-only period:
| Years 1–2 | Years 3–25 | Total interest | |
|---|---|---|---|
| Interest-only mortgage | $3,438/mo | $4,795/mo | $655,825 |
| Standard P+I | $4,606/mo | $4,606/mo | $631,697 |
| Difference | Save $1,168/mo | +$189/mo | $24,129 more |
5-year interest-only period:
| Years 1–5 | Years 6–25 | Total interest | |
|---|---|---|---|
| Interest-only mortgage | $3,438/mo | $5,159/mo | $694,447 |
| Standard P+I | $4,606/mo | $4,606/mo | $631,697 |
| Difference | Save $1,168/mo | +$553/mo | $62,750 more |
Five years of interest-only costs $62,750 more in total interest and creates a $553 per month repayment jump — which is significant and worth planning for well in advance.
When interest-only makes sense in NZ
During a new build
If you're building a home and progressively drawing down on your construction loan, you may not have access to the full loan amount yet — so paying principal on money you haven't fully drawn doesn't make sense. Interest-only during the build period is standard practice in NZ and entirely logical. Most lenders offer it as standard for construction loans.
For investors managing cashflow
Property investors sometimes use interest-only to keep repayments low while rental income covers the interest. The principal reduction is deferred, but the property (in theory) appreciates. This is a deliberate strategy with real trade-offs — the loan never reduces unless you make extra payments or switch to P+I.
Short-term cashflow pressure
If you're going through a period of reduced income — parental leave, a career change, starting a business — a short interest-only period can provide breathing room. Most NZ banks allow existing borrowers to switch to interest-only for 1 to 2 years.
When to be cautious
The repayment jump is real
When your interest-only period ends, your repayments increase — sometimes significantly. Make sure you've modelled what your P+I repayment will be and that your budget can absorb it. The tables above show how large this jump can be, particularly after a 5-year interest-only period.
You're not building equity
Every P+I repayment reduces what you owe. Interest-only payments don't. If property values fall during your interest-only period, you could end up owing more than the property is worth.
Banks have tightened criteria
The RBNZ and NZ banks have restrictions on interest-only lending, particularly for owner-occupiers. Most banks will want to understand why you need interest-only and will have limits on how long they'll grant it.
Modelling your own numbers
The figures above use $750,000 at 5.5% over 25 years. Your situation will be different — your balance, rate, and remaining term all affect the calculation.
Use Owly's Mortgage Repayment Calculator to see your standard P+I repayments and model how different interest-only periods affect your total interest cost.
See your full debt picture in one place
Add your mortgage to Owly — including interest-only loans — and see exactly what your debt is costing you and when you'll be debt-free. Free, no bank connection required.
Frequently Asked Questions
What is an interest-only mortgage in NZ?
An interest-only mortgage lets you pay just the interest on your loan for a set period — typically 2 to 5 years — without paying down the principal. Your repayments are lower during this period, but your loan balance stays the same. When the interest-only period ends, you switch to principal and interest repayments, which are higher because you're paying off the full balance in a shorter remaining term.
How much does interest-only cost over the life of a mortgage in NZ?
On a $750,000 mortgage at 5.5% over 25 years, a 2-year interest-only period costs an extra $24,129 in total interest compared to a standard principal and interest mortgage. A 5-year interest-only period costs an extra $62,750. The longer the interest-only period, the more expensive it becomes.
What happens to my repayments when the interest-only period ends?
When your interest-only period ends, your repayments increase — sometimes significantly. On a $750,000 mortgage at 5.5%, a 2-year interest-only period results in repayments $189 per month higher than a standard mortgage once P+I kicks in. A 5-year period results in repayments $553 per month higher. Make sure your budget can absorb this increase before choosing interest-only.
Can I get an interest-only mortgage in NZ as an owner-occupier?
Yes, but banks have tightened their criteria. Most NZ banks will want to understand why you need interest-only and will have limits on how long they'll grant it — typically 1 to 5 years. The RBNZ has restrictions on interest-only lending, particularly for owner-occupiers. Investors generally have more flexibility.
Is interest-only a good idea for a new build in NZ?
Yes — interest-only during a construction loan is standard practice in NZ and makes logical sense. Because you're progressively drawing down the loan as the build progresses, you're only paying interest on the amount drawn at any given time. Paying principal on money you haven't fully accessed yet doesn't make sense. Most lenders offer interest-only as standard for construction loans.