Interest-only loans are making a comeback for residential property buyers after increasingly punitive interest rates and tougher terms than rival products.

The loans, which allow borrowers to pay only loan interest for some of the term, are being repackaged by major lenders with lower rates to make them more competitive with principal and interest alternatives.

Westpac, the nation's second-largest lender, is cutting interest-only mortgage rates by up to 30 basis points for new investor borrowers. Its fixed-rate headline rate is 4.39 per cent for one year and 4.15 per cent for two.

CBA, Australia's largest lender, has recently cut a range of fixed interest-only home loans ranging from one to four years by up to 50 basis points. Its two-year fixed interest-only investment home loan has a headline rate of 4.34 per cent.

Analysis of 50 lenders during May reveals they are repricing loans across their investor and home buyers range with decreases in some interest-only and principal and interest loans being offset by increases in others. 

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