Interest-Only vs Principal & Interest Calculator
Compare the true cost of an interest-only period versus starting principal & interest repayments from day one.
Interest-Only vs Principal & Interest: What's the Real Difference?
Interest-only (IO) loans are a common feature of the Australian mortgage market, particularly for property investors. During the IO period, your monthly repayment covers only the interest charged — the loan balance stays exactly where it started. Once the IO period ends, the loan switches to principal and interest (P&I), and repayments jump significantly.
The Hidden Cost of Going Interest-Only
The IO strategy costs more in total interest for two reasons. First, you pay interest on the full loan balance for the entire IO period, with no reduction. Second, when the loan switches to P&I, the same principal must be repaid over a shorter remaining term — making each P&I repayment higher than if you'd started P&I from day one. This combination means the IO strategy consistently results in a higher total cost over the life of the loan.
What Is Repayment Shock?
Repayment shock refers to the jump in required monthly repayments when your loan switches from IO to P&I. On a 30-year loan with a 5-year IO period, the P&I repayments after year 5 are calculated over the remaining 25 years — with the full original principal still outstanding. This can mean repayments increase by 20–40% or more, catching borrowers unprepared. The calculator above shows you exactly what this transition looks like for your specific loan.
When IO Makes Financial Sense
Despite the higher total cost, IO loans can make sense in specific situations:
- Property investors: Interest payments on investment properties are tax-deductible. The after-tax cost of IO is lower than the headline figures suggest, and lower repayments improve cash flow for other investments.
- Short-term ownership: If you plan to sell the property before or shortly after the IO period ends, the loan balance remaining doesn't matter as much — the property sale will clear it.
- Cash flow management: Some borrowers use IO periods to keep mortgage repayments low while building savings, an emergency fund, or investing in higher-returning assets during the IO period.
APRA's Restrictions on IO Lending
Since 2017, APRA has placed serviceability restrictions on IO lending to cool the investment property market. As a result, IO loans for owner-occupiers are harder to obtain, often carry a rate premium over P&I loans, and are subject to stricter assessment. Lenders assess your ability to service the full P&I repayment, even during the IO period. Always have a plan for the switch to P&I repayments.