What’s Interest Only?

A business loan repayment typically has two parts:

  • principal – your loan balance, or the initial amount that you borrow
  • interest – a percentage of your balance charged by your lender, payable on top of the balance.

With an interest only loan, you only repay the interest charges on your loan, and not the principal. This means your actual loan balance won’t reduce during the interest only period.

What you need to know about Interest Only loans

You’ll pay more interest over the life of your loan

When you pay both the principal and interest, you reduce your loan balance earlier in the loan term. Because interest is calculated on the outstanding balance of your business loan, this means the amount of interest you pay will also reduce.

However, during the interest only period, you’re not paying down the loan principal. As you’re not reducing your loan balance, you’ll end up paying more interest over the life of your loan.

There are limits on interest only periods

You can switch between principal and interest repayment options during the life of your loan.

However, there are limits on the interest only periods for all of our business loans. These limits apply when you request a new or extended interest only period.

What happens when Interest Only period expires?

When your interest only period expires, your business loan payments will change to principal and interest. Your repayment amounts will increase as you start paying off your loan balance.

It’s important to be prepared for this change and plan accordingly. To find out the expiry date for your business loan, log on to NetBank > View account > Account Information and select your interest only business loan from the drop-down list.

How Interest Only affects repayments

With an interest only loan, you choose to make payments that only cover the interest amount for a set period. Your payments will be lower than if you were repaying both the principal and interest, but your loan balance won’t reduce.

At the end of this period, you’ll need to repay the loan principal over the rest of the term of the loan. This means the principal and interest payments will be higher than they would have been before the interest only period.

Here’s an example:

Matteo takes out a BetterBusiness Loan of $100,000 for five years, at an interest rate of 5%.

If he were to make principal and interest repayments, his monthly repayments would be $1,888. Over the life of the loan, he would pay $13,228 in interest.

However, Matteo sets a one-year interest only period. Therefore, his first 12 monthly payments are only $417 each.

For the remaining four years of the loan, he needs to repay the principal and interest at 5%. So his monthly repayments increase to $2,303.

Over the life of the loan he’ll pay a total of $15,541 in interest – $2,313 more than a principal and interest loan.

This repayment is based on a discount or interest rate that applies for an initial period only. Repayments will change when the discount ceases or the interest rate reverts to the applicable variable rate.

Graph of how interest only affects repayments

Know your options

Transition to a principal and interest loan

Once the interest only loan expires, your loan will automatically transition to principal and interest. If you’re happy with this, there’s no need to take any action.

Extend your interest only period to keep repayments low

If you would like to extend the interest only period on your loan, please speak to our Business Banking team on 13 19 98 or your Relationship Manager about your options.

We may need to assess your financial circumstances to approve you for a new interest only period. 

Get a new interest only business loan

Speak to our Business Banking team or your Relationship Manager about your options. Call Business Banking Services on 13 19 98

 

Things you should know

All amounts, rates and calculations shown above are examples only and are not necessarily complete or accurate. They have been prepared without taking into account your objectives, financial or taxation situation or needs. You should consider the appropriateness of the information to your circumstances before acting on it. Credit provided by the Commonwealth Bank of Australia. These products are only available to approved business customers and for business purposes only. This offer cannot be used to refinance existing debt or purchase an asset. Applications for finance are subject to the Bank's eligibility and suitability criteria and normal credit approval processes. Individuals should view our current Terms and Conditions for Business Finance and consider them before making any decision about these products. Fees, charges and Terms & Conditions apply. For current interest rates, visit Business banking rates and fees. Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian credit licence 234945.