Every Australian home loan repayment has two components: the interest charged on the outstanding balance, and the principal (the actual loan amount). With principal and interest repayments, every payment reduces the loan balance. With interest-only repayments, you pay only the interest component each month — the loan balance stays the same until the interest-only period ends. Both approaches have legitimate uses, but choosing the wrong one for your situation is a costly mistake.
Principal & Interest: The Standard Repayment for Owner-Occupiers
Principal and interest (P&I) is the standard repayment structure for owner-occupied home loans in Australia. With P&I, every repayment reduces the outstanding loan balance — slowly at first, then faster as the interest component shrinks and more of each repayment goes toward principal. Over a typical 30-year loan term, a $600,000 loan at 6.0% p.a. would cost approximately $1,079,000 in total repayments, with $479,000 representing interest.
P&I repayments build equity progressively, improve your LVR over time, and result in lower total interest paid compared to an interest-only loan of the same amount and rate over the same period. Most lenders price P&I loans at slightly lower rates than IO loans — reflecting the lower risk to the lender as the outstanding balance declines.
Interest-Only Repayments: Strategy or Shortcut?
With an interest-only loan, your monthly repayment covers only the interest charged on the outstanding balance — the principal balance does not reduce. On a $600,000 loan at 6.3% p.a. (IO rates are typically higher than P&I), your monthly repayment would be approximately $3,150 per month — compared to $3,597 per month on P&I at 6.0% p.a. The lower payment frees up $447 per month, which investors often direct toward saving for their next deposit or covering property expenses.
However, at the end of the IO period, the loan reverts to P&I over the remaining term — causing repayments to jump significantly. If a 30-year loan is interest-only for 5 years, the remaining 25 years of P&I repayments are calculated on the original $600,000 (the balance has not reduced), compressed into 5 fewer years.
Tax Deductibility on Investment Loans
Interest on investment property loans is generally tax deductible against rental income and other income. Because IO repayments are entirely interest (no principal), the full monthly repayment is potentially tax deductible during the IO period. This is a key reason many Australian investors choose IO for investment loans. Confirm the tax treatment with your accountant.
APRA's Rules on Interest-Only Lending in Australia
The Australian Prudential Regulation Authority (APRA) sets limits on interest-only lending at both the system and individual borrower level. Currently, IO periods are capped at five years for owner-occupied loans and five years per IO period for investment loans. After the IO period, the loan automatically converts to P&I for the remaining term — you cannot simply extend the IO period indefinitely.
APRA also requires lenders to assess IO loans at the rate that will apply when the loan converts to P&I — which means your serviceability is assessed at a higher repayment amount than your initial IO payments. This can reduce borrowing capacity compared to a P&I assessment. IO loans are also assessed at a 3% buffer above the actual rate, as required by APRA for all Australian home loans.
IO Loans Are Not Suitable for All Owner-Occupiers
While interest-only is legitimate for some owner-occupier strategies (such as bridge finance or during a period of low income), using IO as an owner-occupier primarily to reduce repayments is risky — you are not building equity, and the revert-to-P&I shock can be significant. IO is most appropriate for investment loans with a clear exit strategy.
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About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.