Free Tool · Australia
Interest Only vs Principal + Interest
Compare the repayment and total cost of an Interest Only loan against a standard Principal + Interest loan over the same term.
Compare the repayment and total cost of an Interest Only loan against a standard Principal + Interest loan over the same term.
Estimates only. Assumes loan reverts to P&I at the same IO rate after IO period. Actual lender terms, reverting rates, and eligibility differ.
Last reviewed 12 July 2026 · rates and thresholds verified against official FY2026-27 sources.
Every Australian home loan repayment is built from two parts: interest (the lender's charge for lending you the money) and principal (the actual loan balance you owe). The repayment structure you choose decides whether you pay down that balance from day one or leave it untouched for a while. A Principal & Interest (P&I) loan chips away at both with every repayment, so the debt steadily shrinks and your equity grows. An Interest Only (IO) loan pauses the principal portion for a set period — usually one to five years for owner-occupiers, and up to ten years for some investors — so during that window you pay only the interest and your balance stays exactly where it started.
This matters in Australia because IO lending sits under close regulatory watch and almost always costs more over the full life of the loan. The trade-off is purely about timing and cash flow: IO frees up money in the short term, while P&I costs more each month now but builds equity and reduces lifetime interest. This calculator puts both side by side so you can see the monthly cash-flow saving against the extra interest you pay for it.
The tool runs two separate amortisation paths on the same loan amount and term, then compares them.
Interest Only repayment is the simplest: monthly repayment equals the loan balance multiplied by the annual rate, divided by 12. Because no principal is repaid, the balance is unchanged at the end of the IO period — you still owe the full original amount.
Principal & Interest repayment uses the standard amortisation formula. The monthly repayment equals P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly repayments (years × 12). This produces a fixed repayment that fully clears the debt by the end of the term.
For the IO path, the calculator models what most lenders actually do: after the IO period ends, the loan reverts to P&I but over the remaining term only. So a 30-year loan with a 5-year IO period must repay the full balance over the leftover 25 years — squeezing the same principal into fewer years, which is what drives the repayment jump. The "extra interest" figure is the difference in total interest between taking the IO path and choosing P&I from the start.
Assume a $600,000 loan over a 30-year term. The P&I rate is 6.25% and the IO rate is 6.60% (lenders typically price IO around 0.15–0.40% higher). The investor chooses a 5-year IO period.
These figures are illustrative and depend on the exact rate and reversion terms your lender applies — change the inputs above to model your own loan.
IO is most commonly used by property investors. Because interest on an investment loan is generally tax-deductible while principal repayments are not, some investors prefer to keep deductible interest high and direct spare cash toward non-deductible debt (such as their own home loan) instead. IO can also suit borrowers expecting a temporary income drop — parental leave, a career break, or a renovation period — or those building a new home who don't want full repayments until construction finishes.
The headline risk is repayment shock. When the IO period ends, repayments can rise sharply because the same principal is compressed into a shorter remaining term, on top of the higher balance you never reduced. Borrowers who didn't plan for this can find the new repayment uncomfortable. There's also the matter of building no equity during the IO years — if property values stall or fall, an IO borrower has a thinner buffer than a P&I borrower who has been paying the loan down.
Interest Only lending in Australia is regulated more tightly than standard P&I borrowing. The Australian Prudential Regulation Authority (APRA) has historically applied caps and heightened oversight to the share of new IO lending, and lenders assess IO applications carefully. A key part of that assessment is the serviceability buffer: APRA expects lenders to test whether you could still afford the loan at an interest rate around 3 percentage points above the actual rate. Critically, for IO loans this serviceability test is usually run on the P&I repayment over the remaining term after IO ends — not the lower IO repayment — so qualifying for IO is often harder, not easier, than it first appears. Banks also apply the Household Expenditure Measure (HEM) as a benchmark for your living costs when checking serviceability.
This tool estimates and compares monthly repayments and total interest for an IO loan (with a reversion to P&I) against a P&I loan over the same amount and term. It is designed to make the cash-flow saving and the lifetime cost difference clear at a glance.
It does not account for: changes to interest rates over time (it assumes the IO rate continues after reversion, which is a simplification — your lender may apply a different revert rate), fees and charges, Lenders Mortgage Insurance, offset or redraw balances, tax deductions or your marginal tax rate, or your individual eligibility. It is general information only and not personal financial advice. For repayment and structure guidance specific to your situation, speak to a licensed mortgage broker or financial adviser, and use the federal government's Moneysmart resources at moneysmart.gov.au as an independent starting point.
The lower repayment only covers interest, so your loan balance never shrinks during the IO period. You then pay interest on that full balance for longer, and the IO rate is typically higher to begin with. The lower monthly cost now is effectively borrowed against a higher total cost later.
It depends on the IO length and remaining term, but a jump in the order of 20–50% is common. The full balance must be repaid over a shorter remaining term, so the principal is compressed into fewer years. The calculator's "after IO period reverts to P&I" figure shows your specific increase.
For an investment property, interest is generally deductible against your assessable income whether the loan is IO or P&I — the structure doesn't change deductibility, only how much interest you pay. Principal repayments are never deductible. For an owner-occupied home, neither interest nor principal is deductible. Always confirm your position with the Australian Taxation Office (ato.gov.au) or a registered tax agent.
Sometimes, but it's not automatic. Extending IO is a new credit decision and the lender must re-assess your serviceability under APRA's rules, often at the higher buffered P&I repayment. Approval isn't guaranteed, and extending further increases the total interest you'll pay.