An interest-only loan charges only the interest for a set period, usually up to five years, so the balance does not fall. A principal and interest loan repays the debt from the first repayment. For a property investor the choice is less about the size of the repayment and more about where each dollar of cash flow does the most work.
With the cash rate raised to 4.60% on 29 September 2026, the fourth rise this year, the question is back on most investors' desks. Interest-only looks like relief. Sometimes it is exactly the right structure. Sometimes it is a cost that only shows up three purchases later.
How common is interest-only for investors?
Very. According to the Reserve Bank, around 40 per cent of new investor lending since 2018 has been interest-only, compared with 8 to 12 per cent for owner-occupiers (RBA Bulletin, May 2026). The same research finds investors pay their loans down more slowly than owner-occupiers, which the RBA suggests likely reflects tax settings. Investors are not choosing interest-only by accident. The question is whether they are choosing it with a plan for what comes after.
What does interest-only actually cost?
Moneysmart puts it plainly: the rate on an interest-only loan can be higher than on principal and interest, so you pay more over the life of the loan (ASIC Moneysmart). The table shows how much, using a $600,000 investment loan over 30 years with a five-year interest-only period.
| Interest-only for five years | Principal and interest | |
|---|---|---|
| Early repayments | About $490 to $600 a month lower | Full repayment from the first month |
| Repaid by year five | Nothing | About $35,000 to $42,000 |
| At expiry | Repayment steps up 21 to 29 per cent | No change |
| Lifetime interest | About $45,000 more | The baseline |
| Capacity assessed over | The remaining 25 years, usually | The full 30 years |
Illustrative calculations only, not an offer or a quote: $600,000 over 30 years at rates between 6.00% and 7.00%, with the same rate assumed for both options. In practice interest-only is often priced higher, which widens the gap.
Why investors choose interest-only anyway
Because the real question is where the cash goes. Interest on a loan used to buy an income-producing property is generally deductible. Principal repayments are not, and interest on your own home loan is not deductible at all. So many investors keep investment debt interest-only and send every spare dollar at the home loan, or into an offset account against it. Total debt can fall just as fast, but the debt that remains is the deductible kind. That is the logic behind debt recycling. It is general information, not tax advice: confirm how it applies to you with your accountant.
The second reason is cash flow while a portfolio is being built. With Brisbane houses yielding around 3.3% gross (our lending snapshot), rent rarely covers principal and interest repayments on a new purchase. Interest-only narrows the shortfall while the next acquisition is being prepared.
The third is flexibility. An offset account against an interest-only investment loan holds a buffer that reduces the interest charged without permanently reducing the balance. Using redraw instead can blur what the borrowed money was used for, which matters for deductibility. We unpacked the difference on episode 109 of the podcast.
The costs nobody mentions at settlement
It uses more borrowing capacity than the repayment suggests
Lenders generally assess an interest-only loan on the principal and interest repayment over the remaining term, plus APRA's 3 point buffer. A five-year interest-only period on a 30-year loan is assessed as if it were a 25-year loan. The repayment you pay is the smaller number. The repayment the next lender sees is the larger one. It is one of the quiet reasons investors stall after property two.
The expiry is a new credit decision
When the period ends the repayment steps up, and extending it is a fresh assessment, not a formality. If your income, the rate or lender policy has moved against you, the answer can be no. Lenders also cap how long a loan can stay interest-only: the Commonwealth Bank, for example, allows up to 15 years in total over the life of an investment loan and none in its final five years (CommBank).
It leans on growth to build equity
An interest-only loan builds no equity from repayments. That is fine while values rise. Brisbane dwelling values are now 2.7% below their May 2026 peak (Cotality, August 2026). In a flat or softening stretch, the loan-to-value ratio you need for the next purchase does not improve on its own.
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When principal and interest is the right call
On your own home, almost always. The interest is not deductible, so every dollar of principal repaid is a dollar of the most expensive kind of debt gone. Principal and interest also suits the consolidation phase, when the acquisitions are done and the job becomes reducing risk ahead of retirement. And it is the safer setting on a loan with a high loan-to-value ratio in a softening market, where equity from repayments may be the only equity being built.
When interest-only is the right call
During the acquisition phase, when further purchases are planned and the capacity each loan consumes has been mapped. When there is non-deductible home debt to clear first. During a construction or development build, where interest-only is the norm. And as a deliberate buffer through a rate rise, provided there is a written plan for the day the period ends.
The strategist's answer: decide per loan, in sequence
Across a portfolio it is rarely one or the other. A common structure is interest-only on investment debt with an offset account, principal and interest on the home, and a written date for when each interest-only period ends and what happens then. The order matters. Expiries are staggered so they do not all land in the same year, and the next purchase is timed around the capacity each period consumes. That is sequencing applied to repayment type.
"Interest-only is not cheaper. It is cash flow moved from today to later. The only question is whether later has been planned."
Common questions
Is interest-only cheaper than principal and interest?
Only in the short term. Repayments are lower during the interest-only period because none of the debt is repaid, but you pay more interest over the life of the loan and the rate is often higher. On a $600,000 loan over 30 years, a five-year interest-only period adds roughly $45,000 in interest at rates between 6.00% and 7.00%.
How long can an investment loan be interest-only?
Interest-only periods are commonly set for up to five years. Some lenders allow further periods: the Commonwealth Bank, for example, allows up to 15 years in total over the life of an investment loan. Each extension is a fresh credit assessment, so it is never automatic.
Does interest-only reduce my borrowing capacity?
Usually, yes. Lenders generally assess an interest-only loan on the principal and interest repayment over the remaining term, plus APRA's 3 percentage point buffer. A shorter repayment term means a higher assessed repayment, which uses more of your capacity than the interest-only repayment suggests.
What happens when my interest-only period ends?
The loan switches to principal and interest over the remaining term, so repayments step up. In the example in this article the increase is 21 to 29 per cent. Plan for it at least six months ahead: an extension, a refinance or a restructure each needs a new assessment.
The takeaway
Interest-only and principal and interest are both tools. Interest-only buys cash flow and flexibility now, and charges for it later in interest, borrowing capacity and a repayment step-up. Principal and interest builds equity whatever the market does. The right answer depends on which loan, which phase of the portfolio and what comes next.
If you want your current loans reviewed against your next move, Book a Call. Fifteen minutes with the team will tell you whether your structure is working for the portfolio or against it.