Principal & interest vs interest only
P&I pays down the loan; IO doesn't. Interest-only is cheaper short-term but costs more across the loan life — and APRA regulates how much IO is in the market.
How each works
P&I (Principal & Interest): every monthly payment covers the interest charge plus a portion of the principal. The loan balance reduces over time. By month 360 (year 30), the balance is zero.
Interest Only (IO): payments cover only the interest charge — the principal balance stays the same throughout the IO period (usually 1-5 years). After IO ends, the loan converts to P&I and repayments jump significantly because the same principal must now be paid down over the remaining shorter term.
Why investors use IO
Tax — interest is deductible, principal repayments aren't. By paying only interest on the investment loan, the investor maximises deductible expenses while keeping spare cash to pay down their owner-occupied loan (where principal repayments don't yield tax benefits).
Cash flow — IO repayments are typically 25-35% lower than P&I, which can be the difference between a property being cash-flow neutral or a $400/month cash drain.
Risks
End-of-IO payment shock — when IO converts to P&I, repayments jump dramatically. Many borrowers have to refinance to extend or restructure. Higher rate — most lenders price IO at 0.10-0.30% above the equivalent P&I rate. Equity standstill — you don't build equity through repayments, only through capital growth. In a flat market, that's nothing for years.
Related guides
Put this guide into action
Compare actual rates or model the numbers — both refresh daily from open-banking data.
Want this applied to your scenario?
A 30-min broker consult turns this guide into specific numbers for your situation — no fees, no obligation.