Interest Only vs Principal and Interest Investment Loan Australia

Choosing between interest only (IO) and principal and interest (P&I) repayments is one of the most important structuring decisions you will make as a property investor. It affects your cash flow, tax deductions, borrowing capacity, and long-term equity position.

This article breaks down both options with clear numbers so you can make an informed decision. For a full guide to investment property lending, see our property investment loans Australia page.

What is an interest only loan?

With an interest only loan, you pay only the interest charges each month. The loan balance does not reduce during the IO period (typically 1 to 5 years). After the IO period ends, the loan automatically reverts to principal and interest repayments for the remaining term.

Example: On a $500,000 loan at 6.5%, your monthly IO repayment would be approximately $2,708. Once it reverts to P&I over the remaining 25 years, that jumps to approximately $3,377.

What is a principal and interest loan?

With P&I repayments, you pay both interest and a portion of the principal each month. The loan balance gradually reduces over the full loan term (usually 30 years).

Example: The same $500,000 loan at 6.5% over 30 years would have monthly P&I repayments of approximately $3,160 from day one.

Side-by-side comparison

Figures are illustrative. Actual amounts depend on your specific rate and loan term.

When does interest only make sense?

• Maximising cash flow – the lower monthly repayment frees up cash that you can direct toward other investments, offset accounts, or savings
• Maximising tax deductions – because the loan balance stays high during the IO period, the deductible interest remains constant. This is particularly valuable for negatively geared properties in the early years
• Preserving borrowing capacity – the lower repayment amount means lenders may assess your serviceability more favourably, allowing you to borrow for additional properties sooner
• Short to medium term hold – if you plan to sell within 5 to 7 years, paying down principal is less valuable because you will realise your return through capital growth at sale

When does principal and interest make sense?

• Long-term hold strategy – if you plan to hold the property for 10+ years and want it debt-free (or close to it) by retirement
• Lower total cost – P&I loans cost less in total interest over the full loan term because the balance reduces from day one
• Equity building – every repayment increases your equity, which you can later use to fund additional purchases
• Lower rate – some lenders offer a slightly lower interest rate for P&I repayments (typically 0.1 to 0.3% lower than IO)

What about a split approach?

Many investors use a combination: IO on their investment loans (to maximise deductions and cash flow) while paying P&I on their owner-occupier loan (where the interest is not deductible and you benefit from reducing the non-deductible debt first).

This is a common structuring strategy that we model for clients during the comparison process.

Next steps

The right repayment structure depends on your investment strategy, tax position, and how many properties you plan to hold. Read our full investment loans guide or book a free strategy call and we will model both options with real numbers for your situation.