Rates & Structure · 14 September 2026 · Written by Arapeta Albert, Financial Adviser (FSP433026)
What an interest-only period changes, what it leaves exactly where it was, and why the bank assesses you as if it has already ended.
In this article
An interest-only mortgage is a home loan where, for an agreed period, your scheduled repayments cover only the interest charged. The balance you owe does not go down unless you choose to repay extra. When the period ends, the loan moves to principal and interest repayments over whatever term is left. In New Zealand interest-only is usually a feature applied to a loan, or to one portion of it, for a set number of years, rather than a separate kind of mortgage.
The Reserve Bank's own statistics define it by what the contract requires rather than what the borrower does. It classes interest-only as a payment type with no scheduled repayments, which includes loans where borrowers independently choose to repay principal, such as revolving credit loans with a fixed limit (Source: RBNZ). That definition is more useful than it looks, and we come back to it below.
So the honest summary is short. Interest-only changes the schedule. It does not change the debt, the interest rate, or how the lender decides what you can afford.
There is no regulatory maximum. The length is a lender policy, it differs between lenders, and it differs by who is borrowing and why. As a broad pattern, lenders treat interest-only for an owner occupied home as a short term tool that needs a clear reason, and they are more open to longer periods on investment property, where some lenders now offer extended terms to eligible investors.
Periods are lender policy and change. Tax position: Inland Revenue, residential property interest rules.
The tax row explains much of the difference. Inland Revenue confirms that from 1 April 2025 investors can claim 100% of the interest incurred on residential rental property (Source: IRD). Interest on your own home is a private cost and is not deductible, so the same repayment structure can look quite different depending on which property it sits on. Tax treatment depends on your circumstances, and a tax adviser is the right person to confirm it.
Age and the remaining term matter too. A long interest-only period sits more comfortably with a borrower who has decades of working income ahead than with one approaching retirement, because the principal still has to be repaid inside the life of the loan.
This is the misunderstanding we meet most often, and the answer is usually no. The lower repayment is real, but it is not the repayment the lender assesses. Lenders generally test whether you could meet principal and interest repayments, at their stress tested rate, over the term that will remain once the interest-only period is over.
Take a 30 year loan with 5 years of interest-only. The lender is not asking whether you can pay the interest. It is asking whether you could repay the whole balance over 25 years. That is a harder test than a standard 30 year loan, not an easier one, which is why a longer interest-only period can reduce the amount a lender is prepared to lend.
The Reserve Bank's settings do not bend either. The debt to income restrictions compare the size of the debt to gross income, and a loan is the same size whether it is interest-only or not. Banks may write up to 20% of new owner occupier lending above a DTI of 6, and up to 20% of new investor lending above a DTI of 7 (Source: RBNZ). How that ceiling works is covered in our guide to debt to income ratios in NZ, and the current settings are recorded on our page of current NZ lending rules.
Most explanations say the repayment goes up because you start repaying principal. That is true but understates it. The principal is not simply added back. It is squeezed into fewer years, because the years spent interest-only come out of the same overall loan term.
The arithmetic needs no interest rate at all. On a $600,000 loan over 30 years, the principal works out at an average of $20,000 a year. Spend the first 5 years interest-only and the same $600,000 must be repaid over 25 years, an average of $24,000 a year. Spend 10 years interest-only and it is $30,000 a year over the remaining 20.
Illustrative averages only. Actual repayments also include interest and depend on the rate and loan structure at the time.
Two timing points sit on top of that. First, the end date was chosen years earlier, and it can land at the same moment as a fixed rate term rolling over, so a borrower can meet a higher principal repayment and a different interest rate in the same month. Second, extending the interest-only period is usually a fresh lending decision rather than an automatic rollover. The lender looks again at your income, expenses and the remaining term, and circumstances that suited interest-only five years ago may not be the ones it sees today.
Here the Reserve Bank's definition earns its place. Interest-only means there are no scheduled principal repayments. It does not mean principal repayments are forbidden. The RBNZ counts a revolving credit loan with a fixed limit as interest-only lending even when the borrower is steadily paying it down, because nothing in the contract requires it (Source: RBNZ).
So the better question is not "interest-only or not" but "is repaying principal compulsory or optional, and on which part of the loan?" That turns on structure more than on the interest-only label.
Extra repayments are generally allowed freely, so optional principal stays genuinely optional. The flexibility usually comes at a floating rate.
Extra repayments are usually limited, or charged a break cost above an allowance. An interest-only loan that is entirely fixed can make optional repayment close to impossible until the term ends.
That is why interest-only and the fix or float decision are really one conversation. How the two interact, and what each rate type trades away, is set out in our guide to fixed versus floating mortgages in NZ. If the goal is to move a loan to a different lender or structure, the costs involved are covered in our guide to refinancing a mortgage in NZ.
There is no general answer, only patterns that depend on what the lower repayment is being used for.
A defined, temporary purpose with an end date, such as parental leave, a renovation, or a planned income change. An investor for whom the cash flow and tax position make sense and who has a plan for the principal. A structure where only part of the loan is interest-only and the rest keeps reducing.
Making a stretched budget fit today, because the higher repayments arrive later with fewer years left. A period with no plan for what happens at the end. A borrower approaching retirement, where the remaining term is short and income may fall.
In our experience at Trebla, the problems rarely come from interest-only itself. They come from the end date nobody wrote down. A household takes a few years of interest-only for a good reason, the reason passes, and the switch arrives unplanned alongside a refix. The borrowers who get the most from interest-only tend to be the ones who decided, at the start, what the saved cash flow was for and what would happen on the day it ended.
Trebla Partners Limited (FSP728251) is a Financial Advice Provider. If you are weighing interest-only for your own home or an investment property, a Financial Adviser can model both repayment paths against your circumstances before you commit. You can book a time at book.trebla.nz/book.
For an agreed period your scheduled repayments cover only the interest charged on the loan, so the balance does not go down unless you choose to repay extra. When the period ends the loan moves to principal and interest repayments, and because the principal now has to be repaid over fewer remaining years, those repayments are higher than they would have been on a standard loan from the start.
Yes, but lenders usually treat it as a short term tool with a clear reason behind it, such as parental leave, a planned renovation or a temporary drop in income, and the periods on offer are commonly shorter than for investors. Criteria differ between lenders and are assessed application by application, so availability depends on the lender and the circumstances.
Usually not. Lenders generally assess whether you could afford principal and interest repayments over the term that will remain once the interest-only period ends, not the lower interest-only repayment. A longer interest-only period leaves fewer years to repay the principal, so it can reduce the amount a lender is prepared to lend rather than increase it. The debt to income restrictions also look at the loan amount, not the repayment type.
The loan switches to principal and interest repayments over the remaining term. On a 30 year loan with 5 years of interest-only, the full principal has to be repaid in 25 years, so on average about 20% more principal is repaid each year than on a loan that had amortised from day one. After 10 years of interest-only the remaining term is 20 years and the average rises to about 50% more. Extending the interest-only period is usually a fresh lending decision, not an automatic rollover.
Interest-only sets the minimum repayment, not the maximum. Whether you can repay extra depends mainly on how the loan is structured: floating and revolving credit portions generally allow extra repayments freely, while fixed rate portions usually limit them or charge a break cost above an allowance. The Reserve Bank counts a revolving credit loan with a fixed limit as interest-only lending, even where the borrower is paying it down.
It depends on what the lower repayment is being used for. It tends to suit a defined, temporary purpose, or an investor for whom the cash flow and tax position make sense, and it tends to work poorly as a way to make an otherwise stretched budget fit, because the higher repayments arrive later with fewer years left. A Financial Adviser can model both repayment paths against your own circumstances.
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This article is general in nature and is not financial advice. It is published by Trebla Partners Limited (FSP728251), a Financial Advice Provider. Lending criteria, lender policies, and relevant rules vary and change regularly. Tax treatment depends on your circumstances. Always seek advice specific to your situation before making decisions, which you can arrange at book.trebla.nz/book. Read our disclosure statement →
