Interest-Only vs Principal and Interest Loans

Two identical $600,000 loans at around 6%: one borrower pays roughly $3,597 a month and owes noticeably less after five years; the other pays about $3,000 and still owes exactly $600,000.

That's the interest-only deal. A principal and interest (P&I) loan chips away at the debt with every payment. An interest-only (IO) loan covers just the bank's interest charge and leaves the loan untouched — cheaper now, and you own nothing more for it. Neither is wrong, but know exactly which trade you're making.

With interest-only, your payment covers the interest bill and nothing else. The principal — the actual debt — just sits there, fully intact.

And IO doesn't last forever: lenders typically allow it for a set window, often up to five years, before the loan flips to P&I whether you're ready or not. IO just moves the repayment job later, and makes it more expensive overall, since the full balance keeps attracting interest for longer.

Property investors, mostly — for a coldly rational reason. Interest on a loan for an investment property is generally tax-deductible (it reduces the income you're taxed on). Principal repayments are not deductible at all.

So investors often keep the investment loan interest-only — maximising the deductible part — and aim the freed-up cash where it works harder, like an offset against their own home loan, whose interest earns no deduction. There's also a simpler motive: lower payments make it easier to hold more properties at once.

When the IO period ends, the loan converts to P&I — but you don't get your 30 years back. Borrow $600,000 over 30 years, spend five of them interest-only, and you now repay the entire $600,000 in the 25 years that remain.

On our 6% example, that means jumping from about $3,000 a month to roughly $3,870 — an increase of nearly 30%, arriving on a schedule the bank set years ago.

Two more costs hide in the brochure. Lenders usually charge a slightly higher interest rate for interest-only, and total interest over the life of the loan is higher, because the full balance sat there generating interest through the whole IO window.

For an owner-occupier — living in the house, with no tax deduction on the interest — IO is usually just an expensive way to feel richer for five years. The classic exceptions are short and deliberate: a temporary income dip, parental leave, bridging between properties. A plan, not a lifestyle.

P&I suits almost everyone living in their own home: every payment buys back a piece of the house, and the loan actually ends. IO suits investors playing the deductibility game, and owner-occupiers with a genuine short-term cash squeeze and an exit plan.

Whichever way you lean, run both repayment numbers — the IO payment and the post-IO payment — before signing. If the bigger number doesn't fit your budget, the smaller one is a countdown, not a bargain.