Interest Only

Plain-English definition. An interest-only (IO) loan is a mortgage where you pay only the interest charged each month for a set period, with no reduction in the loan principal. Repayments are lower, but the debt does not amortise.

How it works in Australia. An interest-only period is temporary. After it ends, the loan normally changes to principal and interest over the remaining term, which can increase the required repayment. Product terms, rates and maximum interest-only periods vary by lender. Use the Interest-Only Loan Ending Calculator to model the repayment handover using the balance, terms and rates entered.

Concrete example. An investor borrows $600,000 at 6.40% IO for 5 years, then P&I for the remaining 25 years. IO repayment: $3,200/month. After 5 years, the principal is still $600,000 — they've paid $192,000 of pure interest. The P&I repayment over the remaining 25 years jumps to about $4,030/month — a 26% increase. By contrast, a P&I loan from day one would have repayments of $3,755 throughout and the balance at year 5 would be about $545,000.

Common confusion. Interest-only repayments can look cheaper during the interest-only period, but the principal remains and later repayments may rise when the remaining term shortens. Tax treatment depends on the purpose and use of the borrowed funds, not simply whether the loan is interest-only. Obtain licensed credit and tax advice for the specific structure.