As interest rates rise, a last-resort plan to slash home-loan costs

Stretched homeowners are already asking about switching part of their home loans to cheaper interest-only payments, but experts urge caution when considering the tactic.

After 10 straight rises in the cash rate so far, about 880,000 low fixed-rate mortgages are due to roll off this year, tipping owners onto higher rates that will increase their monthly mortgage repayments and squeeze household budgets.

Impact of switching to an interest only home loan with your bank

Impact of refinancing with a lower cost lender

Options could include refinancing with a different bank to get a cheaper deal, extending the loan term to bring down repayments, or switching from principal and interest payments to interest only.

Switching to an interest-only mortgage would save $460 each month for an owner-occupier with 28 years left on their $750,000 mortgage, RateCity modelling shows.

The downside is they would pay an extra $29,294 in interest over the life of the loan, assuming the borrower switches back to a principal and interest loan in two years.

Refinancing to a cheaper interest rate was a more attractive option, all being equal. It would save the same homeowner $633 a month and $19,225 over two years.