How interest-only works
On an interest-only (IO) loan you pay just the interest charged each month for an agreed period — usually up to five years for owner-occupiers and up to five to ten for investors. The balance does not fall. When the IO period ends the loan converts to principal and interest (P&I) over the remaining term, which is shorter, so repayments rise sharply.
The numbers on $600,000
| Structure | Repayment years 1–5 | Repayment after | Still owed after 5 yrs | Total interest |
|---|---|---|---|---|
| P&I, 30 years | $3,788 | $3,788 | $561,601 | $763,847 |
| 5 yrs IO, then P&I 25 yrs | $3,245 | $4,047 | $600,000 | $808,948 |
| 5 yrs IO at +0.2 pts | $3,345 | $4,123 | $600,000 | $837,529 |
Under P&I you would have repaid $38,399 of principal after five years; under IO, nothing. Lenders usually price IO higher — RBA data showed investor IO loans about 0.2 points dearer than P&I in August 2026 — which the last row includes.
When interest-only can make sense
- Investors who want to maximise tax-deductible debt on an investment property while paying down their non-deductible home loan.
- Temporary cash-flow squeezes — parental leave, a career break, or bridging between selling and buying.
- Construction loans, where IO applies during the build.
The risks
A middle option
If you want flexibility without paying more interest overall, take a P&I loan with an offset account: you can build savings in the offset in tight years and still keep the balance falling.
FAQ
What is the difference between interest-only and principal and interest?
Interest-only repayments cover just the interest, so the loan balance does not fall. Principal-and-interest repayments cover interest plus part of the loan, so the balance falls to zero by the end of the term.
How much is interest-only on $600,000?
At 6.49% it is $3,245 a month, compared with $3,788 on a 30-year principal-and-interest loan.
What happens when my interest-only period ends?
The loan reverts to principal and interest over the remaining term. On $600,000 at 6.49%, after five years IO the repayment rises to about $4,047 a month over the remaining 25 years.
Are interest-only rates higher?
Usually. RBA lending-rate data in August 2026 showed investor interest-only loans priced about 0.2 percentage points above principal-and-interest loans.
Can first home buyers get interest-only loans?
Some lenders allow it, but the 5% Deposit Scheme requires principal-and-interest repayments, and lenders assess IO applications more strictly.
Related home loan guides
Assumptions & sources
- RBA cash rate target 4.85%: raised 0.25 points on 3 November 2026, effective 4 November (the Monetary Policy Board voted 6–3). It was the fifth rise of 2026, after February, March, May and September. The Board’s next decision is at 2:30pm AEDT on Tuesday 8 December 2026.
- Average owner-occupier variable rate (P&I) 6.49%: Canstar estimate once the September rise was passed on (29 September 2026), in line with RBA Table F6 — new owner-occupier variable loans averaged 6.23% in August 2026, before the rise. Canstar’s average advertised rate across its whole database was 6.75% (13 October 2026) and the lowest variable rate was 5.89% (20 October 2026). As of 3 November no big-four bank had announced how it would pass on the November rise; passed on in full, it lifts the average to about 6.74%.
- Fixed rates: big-four 1–2 year fixed rates ranged from 6.49% (ANZ) to 6.81% (NAB 2-year) in October 2026; the lowest fixed rate on Canstar was 5.79% (1-year).
- APRA serviceability buffer: 3 percentage points above the loan rate (kept unchanged in APRA’s May 2026 review). From 1 February 2026 no more than 20% of a bank’s new owner-occupier lending (and separately investor lending) may be at a debt-to-income ratio of 6 or more.
- LMI: indicative full-doc premiums from one lender’s table published by Home Loan Experts (updated 18 May 2026); insurers price individually and state stamp duty on the premium may apply (none in NSW).
- 5% Deposit Scheme (First Home Guarantee): Housing Australia rules from 1 October 2025 — unlimited places, no income caps; Darwin cap raised to $750,000 from 1 July 2026.
- Repayments use standard amortisation (monthly, fortnightly or weekly compounding to match the payment) with the rate held constant for the whole term; real loans calculate interest daily and rates change.