Everyday Money guide
Interest-Only vs Principal-and-Interest Investment Property Loans
Compare current cash flow, total interest, equity and repayment shock under investment loan structures.
Updated 16 October 2026 • Reviewed by Tools by Layna Editorial Team • General information only
Why this decision is easy to misread
Interest-only repayments cover interest for a defined period without reducing principal. Principal-and-interest repayments cost more each month but gradually reduce the loan balance.
The lower interest-only payment can improve short-term cash flow, but the debt remains unchanged and repayments may jump when the interest-only period ends.
The calculation, step by step
Initial repayment
Interest-only is generally lower during the initial period.
In the calculator, this item should be entered separately so a change in initial repayment can be tested without hiding it inside another assumption.
Principal path
Principal-and-interest builds loan equity through repayments.
In the calculator, this item should be entered separately so a change in principal path can be tested without hiding it inside another assumption.
Total interest
Keeping a larger balance outstanding usually increases lifetime interest.
In the calculator, this item should be entered separately so a change in total interest can be tested without hiding it inside another assumption.
Expiry shock
The remaining principal must be repaid over a shorter remaining term after interest-only ends.
In the calculator, this item should be entered separately so a change in expiry shock can be tested without hiding it inside another assumption.
Tax
Interest may be deductible when borrowing meets the rules; principal is not.
In the calculator, this item should be entered separately so a change in tax can be tested without hiding it inside another assumption.
Strategy risk
The plan may rely on sale or growth rather than debt reduction.
In the calculator, this item should be entered separately so a change in strategy risk can be tested without hiding it inside another assumption.
Worked Australian example
A $520,000 loan at 6.2% costs about $32,240 a year in interest before fees on an interest-only basis. A 25-year principal-and-interest payment is higher, but part reduces the balance.
After five interest-only years, switching to principal-and-interest over the remaining 20 years can create a sharp repayment increase even if the rate is unchanged.
Decision checklist
| Step | What to confirm |
|---|---|
| 1 | Model the post-interest-only repayment. |
| 2 | Compare total interest. |
| 3 | Check exit and refinance assumptions. |
| 4 | Keep a cash buffer for rate increases. |
| 5 | Separate tax treatment from affordability. |
Use the calculator with this guide
Common mistakes
- Choosing interest-only from the initial payment alone.
- Assuming refinance will always be available.
- Ignoring principal reduction in ROI.
- Using tax deductibility as proof of affordability.
- Failing to prepare for expiry.
Questions to answer before acting
- Model the post-interest-only repayment.
- Compare total interest.
- Check exit and refinance assumptions.
- Keep a cash buffer for rate increases.
- Separate tax treatment from affordability.
Record keeping and review
For this calculation, retain the evidence behind initial repayment and principal path.
Official sources
Related guides
Frequently asked questions
Is interest-only better for investors?
It can support some strategies, but it increases debt persistence and total-interest risk.
Does interest-only improve cash-on-cash return?
It can improve current cash flow, but total ROI and risk must also be assessed.
Can extra payments be made?
Product rules vary.
What happens at expiry?
The loan usually switches to principal-and-interest over the remaining term or requires another arrangement.
Is principal a return?
Principal reduction increases equity but is funded from cash repayments.
Bottom line
Interest-only buys short-term cash-flow relief; the investor must price the higher debt and the repayment that follows.