Principal and interest vs interest only

P&I vs interest-only: at a glance

Principal and interest (P&I) repayments pay down the loan balance and the interest charged, so the debt reaches zero by the end of the term. Interest-only (IO) repayments cover just the interest, leaving the balance unchanged, which keeps repayments lower short-term but means IO typically costs more overall and the rate itself usually runs higher.

How much more does interest-only actually cost right now?

Live figures from the same verified panel at 80% LVR, variable rate, as at 20 October 2026: the average owner-occupier interest-only rate runs 0.54 points above the average owner-occupier P&I rate, inside the "typically 0.10-0.30% higher" range above. Investor loans carry the same interest-only premium on top of their own already-higher investor base rate, so an investor interest-only loan compounds both gaps.

How much more does an interest-only rate actually cost right now?

As at 20 October 2026, across Ratesniffers' tracked lender panel at an 80% LVR variable rate, the median interest-only premium over principal and interest is 0.48 percentage points for owner-occupiers (22 lenders with a directly comparable rate at that tier) and 0.20 percentage points for investors (29 lenders). The gap varies widely by lender, from no premium at all up to around 1.8 percentage points for owner-occupiers, so check your own shortlisted lender's P&I and IO rates side by side rather than relying on an average. Compare live interest-only rates to see current pricing by lender.

How does each repayment type work?

P&I (Principal & Interest): every monthly payment covers the interest charge plus a portion of the principal, the loan amortises and the 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 do investors use interest-only loans?

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. Rental market conditions can widen or narrow that gap; see our coverage of current rental vacancy trends.

What are the risks of an interest-only loan?

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: on Ratesniffers' tracked panel, the median IO premium is currently 0.48 percentage points for owner-occupiers and 0.20 percentage points for investors (see above), though it varies widely by lender. Equity standstill: you don't build equity through repayments, only through capital growth. In a flat market, that's nothing for years.

APRA's dedicated 30% interest-only lending benchmark, introduced in 2017, was removed in December 2018 once new IO lending had fallen well under that level. It has since been replaced by a different macroprudential lever: from 1 February 2026, APRA limits ADIs to writing no more than 20% of new mortgage lending to borrowers with a debt-to-income ratio of 6 times income or more, measured separately for owner-occupier and investor lending each quarter. Because an IO loan doesn't reduce the principal during the interest-only period, a borrower's debt-to-income ratio stays higher for longer than it would under P&I, which is one more reason a lender may weigh an IO application more closely under this cap.