Choosing the right investment loan structure can save you thousands of dollars per year. Interest only loans dominated Australian property investment for two decades, then APRA cracked down hard in 2017. Now in 2026, the landscape has shifted again, and investors face a critical decision: should you take an interest only investment loan or stick with traditional principal and interest? This comprehensive comparison breaks down the real numbers, tax implications, and strategic considerations every property investor needs to know.
Understanding Interest Only Investment Loan Structures
An interest only investment loan allows you to pay only the interest charged on the borrowed amount for a fixed period (typically 5 years), without reducing the principal loan balance. A principal and interest (P&I) loan requires you to pay both interest and a portion of the loan principal with each repayment, gradually reducing your debt over the loan term (typically 30 years).
The choice between these two investment loan structures has significant implications for cash flow, tax deductibility, equity building, and long-term wealth creation. Each serves different investor profiles and strategies.
Head-to-Head Investment Loan Comparison
| Factor | Interest Only (IO) | Principal and Interest (P&I) |
|---|---|---|
| Monthly repayment ($600k loan) | $3,050 (at 6.1%) | $3,637 (at 6.1%, 30yr) |
| Cash flow impact | $587/month better | Baseline |
| Loan balance after 5 years | $600,000 (unchanged) | $556,000 ($44k paid down) |
| Tax deductibility | 100% of repayments deductible | Only interest portion deductible |
| Rate premium | 0.1-0.3% higher than P&I | Baseline |
| Lender availability | Most lenders, APRA caps apply | All lenders, no caps |
| Risk profile | Higher (no equity building, revert cliff) | Lower (equity builds, no revert risk) |
Real Numbers: Cash Flow Impact of Your Investment Loan Choice
On a $600,000 investment loan at 6.1%, the monthly repayment difference is $587. Over 5 years, that is $35,220 in additional cash flow with interest only. For investors building a portfolio, this cash can be redirected toward a second or third property deposit, accelerating wealth creation.
However, this cash flow advantage comes with a trade-off. After 5 years on P&I, you will have paid down $44,000 of principal and built equity. With interest only, your loan balance remains $600,000, meaning you have built zero equity through repayments (though property value growth still applies).
Tax Deductibility: The Investment Loan Advantage
Interest only loans offer superior tax outcomes for negatively geared investors. Every dollar of your repayment is tax deductible. On a P&I investment loan, only the interest portion is deductible, the principal component provides no tax benefit.
For a high-income investor on the 47% marginal tax rate (including Medicare Levy), the annual tax saving difference on a $600k loan can exceed $3,000. This makes interest only particularly attractive for professionals and business owners in high tax brackets who are actively building wealth through positive gearing vs negative gearing strategy.
The Interest Only Revert Risk
Most investors underestimate the biggest risk with interest only loans: the revert. IO loans automatically convert to P&I after the interest only period (typically 5 years). The repayment jump can be severe.
On a $600k loan at 6.1%, reverting from interest only to P&I adds $587 per month immediately. But it gets worse: because you now have only 25 years remaining to pay off the full loan (having made no principal payments during the IO period), the catch-up repayments are higher than if you had chosen P&I from the start.
Many investors get caught by this revert cliff. Plan for it before taking interest only. Strategies include: refinancing to a new IO period before revert, selling the property, or ensuring your rental income and personal income can absorb the higher repayments.
Lender Availability and APRA Restrictions
Following the 2017 APRA lending standards crackdown, interest only lending contracted sharply. APRA imposed a 30% cap on new interest only lending as a proportion of total new loans for each bank. This made IO loans harder to access and pushed rates higher.
In 2026, most major lenders offer interest only investment loans again, but availability varies. Some require larger deposits (20% minimum), higher income verification, or restrict IO to specific property types. P&I loans face no such restrictions and are available from all lenders.
Rate Premium: What Interest Only Costs
Interest only loans typically carry a rate premium of 0.1% to 0.3% above equivalent P&I rates. On a $600k loan, a 0.2% premium costs an extra $1,200 per year. Factor this into your cash flow analysis.
Who Should Choose Interest Only Investment Loans?
Interest only suits investors who:
- Are negatively gearing and want maximum tax deductions
- Prioritise cash flow to fund additional property purchases
- Have high personal income (45%+ tax bracket)
- Are actively building a portfolio (acquisition phase)
- Have a clear revert strategy or exit plan
- Understand and accept higher risk for higher potential returns
Who Should Choose Principal and Interest Investment Loans?
P&I suits investors who:
- Are positively gearing or close to neutral gearing
- Want to build equity and reduce debt over time
- Are approaching retirement and prioritise stability
- Own only one or two investment properties (not building a large portfolio)
- Prefer lower risk and predictable repayments
- Cannot comfortably afford the IO revert repayment jump
GeeVee Verdict: The Hybrid Strategy
Most sophisticated portfolio investors use a hybrid approach: interest only on investment properties to maximise tax deductions and cash flow, and P&I on their owner-occupied home loan (where interest is not tax deductible). This strategy optimises both tax outcomes and long-term wealth building.
The right investment loan structure depends on your personal circumstances, tax position, investment goals, and risk tolerance. Interest only offers powerful cash flow and tax advantages for active investors building wealth, but carries revert risk and requires careful planning. P&I provides stability, forced equity building, and peace of mind, but limits portfolio growth potential.
Model both scenarios for your specific investment property and financial situation. Consider speaking with a mortgage broker who understands investment lending and investment property tax deductions. For SMSF property investment strategies, IO loans can offer additional advantages. Also review your broader mortgage strategy, including fixed vs variable rate mortgage options.
Run personalised scenarios and access expert advice at collings.com.au/portal.
Related Posts
- positive gearing vs negative gearing strategy
- SMSF property investment strategies
- fixed vs variable rate mortgage options
Further Reading
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