An interest-only (IO) loan requires you to pay only the interest component of your loan for a set period (typically 1 to 5 years), with no principal reduction during that time. For investment property, interest-only loans are a common cash flow management strategy used by Australian property investors.
Interest-Only vs Principal and Interest Comparison
| Metric | Interest-Only | Principal and Interest |
|---|---|---|
| Monthly repayment ($600k loan at 6.2%) | $3,100 | $3,680 |
| Monthly saving | $580/month | — |
| Loan balance after 5 years | $600,000 | $548,000 |
| Tax deductibility | Full interest deductible | Full interest deductible |
| Equity built during IO period | Only via capital growth | Via repayments + growth |
When Does Interest-Only Make Sense for Investors?
- You are negatively geared and want to maximise tax-deductible interest
- You need to preserve cash flow to fund additional deposits
- You have a PPOR mortgage (non-deductible) that you want to pay down faster
- You are in a short-term hold strategy where capital growth is the primary return
Risks of Interest-Only Loans
- Higher rate than PI loans (typically 0.1-0.4% higher)
- No equity built during IO period unless property grows in value
- Repayment shock when IO period ends and principal repayments begin
- Lenders may not offer IO on investment loans above 80% LVR
Frequently Asked Questions
Is interest-only always better for investment properties?
Not always. If you are positively geared, principal and interest reduces your loan faster and builds equity. Interest-only suits negatively geared investors or those preserving cash flow for further purchases.
How long can I have an interest-only period?
Most lenders offer IO periods of 1 to 5 years for investment loans. Some lenders extend to 10 years for portfolio investors. IO periods can sometimes be renewed, subject to serviceability reassessment.
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