Interest-only (IO) loans for investment properties are one of the most misunderstood tools in Australian property finance. Used correctly, they maximise tax deductions and cash flow. Used incorrectly, they leave investors exposed at revert — when the loan converts to principal and interest (P&I) and repayments jump by 20-40%. GeeVee explains when IO loans make sense and when they don’t.
How Interest Only Loans Work
During the IO period (typically 1-5 years on investment loans), you only pay the interest on the loan balance. The principal does not reduce. When the IO period ends, the loan reverts to P&I — but now with the full principal outstanding and a shortened repayment term. This causes the IO cliff.
The IO Cliff — Real Numbers
| Scenario | During IO (5 years) | After Revert (P&I) | Payment Jump |
|---|---|---|---|
| $600k loan at 6.1% | $3,050/month IO | $4,120/month P&I (25yr) | +$1,070/month (+35%) |
| $800k loan at 6.1% | $4,067/month IO | $5,493/month P&I (25yr) | +$1,426/month (+35%) |
When IO Loans Make Sense for Investors
- You have non-deductible owner-occupier debt — pay down your home loan faster while keeping investment loan interest maximised
- You are in a high marginal tax bracket (45%) — the deductibility of 100% of interest payment saves more tax
- You have a clear exit strategy — sell before revert, refinance at revert, or transition to P&I with planned cash reserves
- Cash flow is tight and you need lower repayments now — but only if growth prospects justify holding
When IO Loans Do Not Make Sense
- You have no owner-occupier debt to prioritise paying down
- You are in a lower tax bracket (under 32.5%) — P&I may be more efficient
- You have no plan for the revert
- The property is negatively geared but not growing — IO maximises losses without offset
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