For investors, choosing between interest-only (IO) and principal and interest (P&I) repayments is one of the biggest structural decisions. It affects your cash flow, total interest paid and how lenders view your next application.
How they differ
Interest-only: you pay just the interest for a set period, usually up to five years. Your loan balance doesn't go down.
Principal and interest: you pay interest plus part of the loan each month. Your balance falls over time.
The cash flow difference
On a $600,000 investment loan:
| Interest-only at 6.89% | P&I at 6.69% (30 yrs) | |
|---|---|---|
| Monthly repayment | about $3,445 | about $3,868 |
| Loan after 5 years | $600,000 | about $563,000 |
IO frees up about $420 a month, but the loan stays at $600,000.
Why investors choose IO
- Better cash flow, especially when rent doesn't cover costs
- Redirect cash to pay down non-deductible home loan debt faster
- Keep funds available for the next purchase
The strategy of paying IO on investment debt while paying down your home loan can make sense from a tax perspective, because home loan interest isn't deductible. Your accountant can confirm whether it suits you.
Why investors choose P&I
- Lower rate. P&I loans usually have lower rates than IO
- Building equity, which reduces risk if values fall
- Easier serviceability. When IO ends, lenders assess P&I over the remaining shorter term, which can reduce borrowing power for future purchases
- Less total interest over the life of the loan
The IO expiry problem
When IO ends, repayments jump because you now repay the full loan over a shorter remaining term. On a $600,000 loan, five years IO followed by P&I over 25 years at 6.89% means repayments of about $4,200, compared with $3,445 during IO.
Some investors refinance or request a new IO period, but lenders assess this carefully.
The 2026 tax changes
From 1 July 2027, negative gearing is limited to new builds for properties bought after 12 May 2026. If you buy an established property now, IO's main tax argument, maximising deductible interest, is weaker for that property. Grandfathered properties keep existing treatment.
Which suits you?
IO may suit you if: - You also have a home loan you want to pay down faster - Cash flow is tight in the early years - You plan to add more properties
P&I may suit you if: - You want to reduce risk and build equity - You want the lowest rate - You don't have non-deductible debt to prioritise
Frequently asked questions
Can I switch from IO to P&I early?
Yes, usually at any time without penalty on variable loans.
How long can I have IO for?
Typically up to five years for investment loans, sometimes longer with some lenders.
Do IO loans cost more?
Usually yes. IO rates are typically higher than P&I rates.
Not sure which repayment type suits your investment? Call Finfident on 0424 545 654. We'll model both, including what happens when IO ends.
This article is general information only and doesn't take into account your objectives, financial situation or needs. Figures, rates and scheme rules are current as at October 2026 and can change. Finfident Finance Brokers (ABN 94 679 280 801) is Credit Representative 569374 of Outsource Financial Pty Ltd (ACN 131 090 705), Australian Credit Licence 384324.