Interest-only lowers your monthly repayments but does not reduce your loan balance. Here is when each repayment structure makes sense.
Every home loan requires you to choose a repayment type: interest-only (IO) or principal and interest (P&I). The choice has significant implications for cash flow, total interest paid, and — for investors — tax treatment.
How Each Works
Principal and interest (P&I): each repayment covers the interest charged for that period plus a portion of the principal (the original amount borrowed). Over time, the loan balance reduces and you build equity. After 30 years (on a 30-year term), the loan is fully repaid.
Interest-only (IO): each repayment covers only the interest charged for that period. The loan balance does not reduce. At the end of the IO period (typically 1–5 years), repayments revert to P&I on the remaining balance — which means higher P&I repayments for a shorter remaining term.
Who Suits Each Type?
P&I suits
- Owner-occupiers who want to build equity and reduce debt over time
- Borrowers who want the certainty of a clear payoff timeline
- Borrowers who do not need to maximise short-term cash flow
IO suits
- Property investors who want to maximise cash flow during the IO period and whose interest is tax-deductible
- Borrowers with short-term cash flow constraints who expect their financial position to improve
- Investors using equity and cash flow for further portfolio acquisition
The Tax Case for IO on Investment Loans
For investors, interest on an investment loan is tax-deductible — but principal repayments are not. This means that paying P&I on an investment loan means using post-tax dollars to reduce a non-deductible component. Many investors therefore choose IO to maximise the tax-deductible portion and direct the freed-up cash flow elsewhere (offset on their home loan, for example).
This is a tax strategy, not a universal recommendation — your accountant's advice matters here.
The Rate Premium for IO
IO loans typically carry a slightly higher interest rate than P&I loans — typically 0.1–0.4% higher — reflecting the fact that the lender's security (the property) does not reduce during the IO period.
What Happens When IO Ends?
When the IO period ends, your loan reverts to P&I for the remaining term. Because no principal was repaid during the IO period, the remaining term is shorter relative to the original debt — meaning higher P&I repayments. Planning for this repayment step-up is important.
Some borrowers refinance at the end of the IO period to reset the IO term with a new lender. A broker can manage this transition proactively.
Contact Sam to discuss the right repayment structure for your home loan or investment portfolio.
Frequently Asked Questions
Can I switch from IO to P&I at any time?
Generally yes, with your lender's approval. Switching from P&I to IO is more restricted — most lenders have specific IO term limits and will not allow indefinite IO periods.
Are IO loans still available in Australia?
Yes — both owner-occupier and investor IO loans are available from most lenders, though they are more common for investment purposes. IO periods of 1–5 years are standard.
Last reviewed 27 July 2026 by Sam Elvitigala, MFAA Accredited Mortgage Broker. General information only — not personal financial or credit advice.