Interest-Only vs Principal and Interest Home Loans

Short answer

An interest-only loan can reduce scheduled repayments for a limited period because those payments do not reduce the principal. When that period ends, the outstanding balance usually has to be repaid over the shorter remaining term. The later principal-and-interest payment can therefore be materially higher.

Use the Interest-Only Repayment Step-Up Calculator to model the handover using the balance, remaining term and rates you want to test. The result is an estimate, not a lender schedule or a recommendation about loan structure.

How the repayment structures differ

With a principal-and-interest loan, each scheduled payment covers interest and repays part of the balance. The interest component generally falls as the balance reduces, assuming the rate and repayment timing stay unchanged.

During an interest-only period, scheduled payments cover interest but do not reduce the principal. ASIC Moneysmart says the loan changes to principal and interest after the interest-only period, which means the borrower starts repaying the balance as well as interest.

Two things can change at that point:

1. principal begins to be repaid; and
2. the original balance must be amortised over fewer years.

A rate change may amplify or offset part of the increase, so the later rate should be tested separately rather than assumed.

Worked example

Assume a $600,000 balance, a 30-year total term, five interest-only years and a 6.50% annual rate for both stages.

• Interest-only payment: $3,250 a month.
• Remaining principal-and-interest term: 25 years.
• Later principal-and-interest payment: about $4,051.24 a month.
• Indicative increase: about $801.24 a month.

This simplified example holds the balance and rates constant. Fees, offsets, redraw, extra repayments, daily interest calculations and lender rounding can change the actual schedule.

What to compare before the interest-only period ends

Check the expiry date and the lender's current estimate of the new repayment. Then model more than one later rate, review any fixed-rate end date, and confirm whether the remaining loan term in the contract matches the term used in the estimate.

APRA's residential mortgage lending guide says lenders should assess an interest-only loan against future principal-and-interest repayments over the actual residual term. A site calculator cannot reproduce a lender's full serviceability assessment, which may use verified income, expenses, other debts, rate buffers and product-specific policy.

If a projected payment may be difficult to meet, ASIC Moneysmart recommends contacting the lender early. A free financial counsellor can also help review options without selling a loan product.

Total interest and equity

If the same balance and rate are used, delaying principal repayments usually increases total modelled interest because the balance remains higher for longer. It also means scheduled repayments do not build equity during the interest-only period. Property-price movements, deposits and improvements can change equity for other reasons, but they are not guaranteed.

Use the Mortgage Repayment Calculator for a standard amortising loan scenario and the Loan Comparison Calculator to compare rates and fees. These are indicative models and do not assess loan approval or personal affordability.

Tax treatment is not determined by the repayment label

Interest-only does not automatically make all interest deductible. The Australian Taxation Office explains that interest deductions for a rental property depend on how borrowed funds are used and whether the property is rented or genuinely available for rent. Private use, mixed-purpose borrowing and redraw can require apportionment.

Principal repayments are not interest expenses. Tax outcomes depend on the transaction and the taxpayer's circumstances, so keep loan records and seek registered tax advice if the treatment is unclear.

Common mistakes

• Comparing only the initial scheduled payment.
• Assuming the later rate will equal today's rate.
• Treating a lower initial payment as a lender affordability decision.
• Ignoring the shorter principal-and-interest term.
• Assuming every investment-loan interest payment is deductible.
• Refinancing or extending a term without counting fees and extra lifetime interest.

Sources

• ASIC Moneysmart: Interest-only home loans, updated 18 June 2026 and checked 11 August 2026.
• APRA Prudential Practice Guide APG 223, checked 9 August 2026.
• ATO: Residential rental properties, checked 9 August 2026.

General information disclaimer

This guide provides general information only. It is not financial advice, credit advice, tax advice, a lender assessment, a quote, approval or recommendation. Rates, fees, loan terms, tax outcomes and lender methods vary. Check the loan documents and speak with a licensed professional where appropriate.

Last updated: 9 August 2026.