An interest-only mortgage lets you pay only the interest on your loan for a set period, keeping repayments lower but not reducing the amount you owe. In New Zealand, interest-only lending has been significantly restricted by the RBNZ since 2021 — particularly for owner-occupiers — making it much less commonly available than it once was.
How Interest Only Mortgages Work
With a standard principal and interest (P&I) loan, each repayment includes:
- Interest on the outstanding balance
- Principal — a portion that reduces the loan amount
With an interest only (IO) loan:
- You pay only the interest
- The loan balance stays the same throughout the IO period
- At the end of the IO period, the loan reverts to P&I repayments — on the same balance you started with
Example: $600,000 loan at 6.0%
| Loan type | Monthly repayment | Balance after 2 years | Equity built |
|---|---|---|---|
| Principal & interest (30 years) | $3,597 | $581,300 | $18,700 |
| Interest only (2 years) | $3,000 | $600,000 | $0 |
The IO borrower pays $597/month less — but builds no equity. When the IO period ends, their P&I repayments on the same $600,000 balance (now over a shorter remaining term) are higher than if they’d been on P&I from the start.
RBNZ Restrictions on Interest Only Lending (2026)
The Reserve Bank introduced restrictions on interest-only lending in 2021 as part of its effort to cool the investment property market:
Owner-occupiers
- Interest only lending is significantly restricted for owner-occupiers
- Banks can lend IO to owner-occupiers, but only in limited circumstances (typically bridging situations, construction loans, or documented financial hardship)
- Standard applications for IO lending from owner-occupiers are generally declined
Residential investors
- Investors can access interest only, but lender limits apply
- IO periods for investors are typically capped at 5 years per IO period
- After the IO period, the loan must revert to P&I — or a new IO period must be specifically approved
- IO lending to investors counts towards the banks’ LVR limits at a higher weighting
Who Uses Interest Only Mortgages in NZ?
Given the restrictions, IO mortgages in NZ in 2026 are primarily used by:
1. Property investors The most common use case. Investors benefit from:
- Lower monthly cash outflow during IO period
- Interest expense is deductible against rental income (for residential rentals, phased back to full deductibility by 2026)
- Flexibility to direct surplus cash to higher-return uses
2. Construction loans During the build period of a new property, borrowers often pay interest only while construction is underway. Once the build is complete, the loan typically converts to P&I.
3. Bridging finance Short-term bridging loans (buying before selling) are commonly IO to keep repayments manageable during the transition period.
4. Financial hardship Some lenders allow existing borrowers facing genuine hardship to temporarily switch to IO payments as a form of mortgage relief.
The True Cost of Interest Only
Interest only reduces short-term repayments but significantly increases the total interest paid over the life of a loan.
Example: $600,000 loan at 6.0%, 25-year term
| Scenario | IO period | Monthly repayment (IO) | Monthly repayment (post-IO P&I) | Total interest paid |
|---|---|---|---|---|
| No IO | — | — | $3,866 | $559,800 |
| 2-year IO | 2 years | $3,000 | $4,075 | $584,000 |
| 5-year IO | 5 years | $3,000 | $4,373 | $619,000 |
Approximate figures. The longer the IO period, the higher the post-IO repayments (shorter remaining term on same balance) and the more total interest paid.
The 5-year IO option pays approximately $59,000 more in total interest than starting on P&I immediately.
Interest Only vs Principal and Interest: Investor Calculation
For investors, the comparison is more nuanced because:
- Interest payments are fully deductible against rental income (restoring to 100% from April 2026 for all residential rentals)
- The tax saving on interest deductions reduces the effective cost of IO
- Cash flow is improved, potentially allowing investment in additional properties
Example: Investor on 33% marginal tax rate, $600,000 loan at 6.5%
Annual interest (IO): $39,000 Tax deduction (at 33%): $12,870 Net after-tax cost: $26,130
On a P&I loan, the principal repayment is not deductible — only the interest component is. So the after-tax cost of IO lending is genuinely lower for investors in a higher tax bracket.
However, zero equity accumulation is the trade-off. Investors relying on capital gain rather than equity build-up through repayment are exposed to market downturns in a way P&I borrowers are not.
What Happens When the IO Period Ends?
When an IO period ends, the loan reverts to P&I repayments — based on:
- The original balance (since IO built no equity)
- The remaining term (which is now shorter)
This causes a repayment shock. On a $600,000 loan with a 5-year IO period:
- During IO: $3,000/month
- After IO (20 years remaining at same rate): approximately $4,373/month
The $1,373 jump can be significant. Plan for this transition well in advance.
Further Reading
- Principal and Interest vs Interest Only NZ — detailed comparison
- Investment Property Mortgage NZ — how IO fits into investor strategy
- Interest Deductibility NZ Rental Property — current tax rules
- LVR Restrictions NZ — RBNZ framework including IO limits
- Fixed vs Floating Mortgage NZ — loan structure decisions