Interest-Only vs Principal & Interest for Property Investors (2026)
A $600k worked example: IO saves $540 a month for five years but costs $45k more over the loan. When IO is the smarter tax play, when P&I wins, and a simple decision rule.
Most Australian investment loans start interest-only (IO), and most financial advice says principal and interest (P&I) is "safer". Both are right for different people. The decision comes down to three things: whether you also have a home loan, how tight your cash flow is, and what you plan to do with the money IO frees up.
The difference in one example
$600,000 investment loan at 6.5% over 30 years.
| P&I for 30 years | 5 years IO, then P&I | |
|---|---|---|
| Repayment, years 1–5 | $3,792 / month | $3,250 / month |
| Repayment, years 6–30 | $3,792 / month | $4,051 / month |
| Loan balance after 5 years | ~$561,700 | $600,000 |
| Total interest over 30 years | ~$765,000 | ~$810,000 |
IO saves about $540 a month for five years, but costs about $45,000 more in total interest over the life of the loan, and your repayment jumps by about $800 a month when the IO period ends because you now repay $600,000 over 25 years instead of 30.
The case for interest-only
1. You have a non-deductible home loan
This is the big one. Investment loan interest is tax deductible; home loan interest is not. Every dollar of principal you repay on the investment loan is a dollar you could have used to pay down the home loan instead. Paying down the home loan saves you the full interest rate. Paying down the investment loan saves you only the after-tax rate. At a 39% tax rate, 6.5% deductible interest effectively costs you about 4%. The best place for the $540 a month IO frees up is your home loan offset. See offset vs redraw for why it should be an offset.
2. Cash flow buffer
Most investment properties are negatively geared in the early years. IO keeps the weekly shortfall smaller, which makes the property easier to hold through vacancies and rate rises. Our negative gearing guide shows the after-tax numbers.
3. Building a portfolio
Lower repayments improve your serviceability for the next loan in some lender calculators and free up cash for the next deposit. This is how many multi-property investors scale. It also concentrates risk, so it is a strategy, not a default.
The case for principal and interest
- Lower rate.IO investment loans are typically priced 0.2 to 0.6 percentage points above P&I investment loans. On $600,000 that is $1,200 to $3,600 a year.
- Forced savings. If you would spend the $540 a month rather than offset it against your home loan, IO just costs you more.
- Equity buffer. Repaying principal protects you if prices fall, and builds usable equity for the next purchase.
- No repayment shock. IO periods end. Lenders reassess you at the time, and an extension is not guaranteed.
- No home loan. If you rent where you live, there is no non-deductible debt to redirect money to, which removes the main tax argument for IO.
A simple decision rule
If you rent where you live and own investments elsewhere, read our rentvesting guide for how the maths changes.
Check the cash flow before you choose
Run the property's cash flow in our rental yield calculator, which shows cash flow on an interest-only basis, or get a free postcode report with estimated repayments, yield and 5-year total return.