The short version: interest-only (IO) keeps repayments lower and the interest fully tax-deductible, which is good for cash flow and holding more property. Principal & interest (P&I) builds equity and usually has a lower rate, which suits a long-term hold. Most investors choose based on cash flow and tax; owner-occupiers almost always use P&I.
It's one of the first decisions on an investment loan, and it changes your repayments, your equity, and your tax.
What's the difference?
With interest-only, for a set period (usually 1–5 years) you repay only the interest, not the loan balance. With principal & interest, every repayment chips away at both the interest and the balance, so you steadily own more of the property.
| Interest-only (IO) | Principal & interest (P&I) | |
|---|---|---|
| Monthly repayment | Lower | Higher |
| Interest rate | Usually a bit higher | Usually lower |
| Builds equity? | No (balance stays flat) | Yes (balance falls) |
| Cash flow | Stronger | Tighter |
| Total interest paid | More over the life of the loan | Less |
| Typically suits | Investors (cash flow + tax) | Long-term holds & owner-occupiers |
The dollar difference
The exact repayment difference between interest-only and principal & interest depends on your loan size and the rate you're offered, so there's no single figure that fits everyone. Run your own numbers on the home-loan repayments calculator using today's rates.
Why investors often choose interest-only
- Lower repayments free up cash flow to hold the property, or buy the next one sooner
- The interest on an investment loan is generally tax-deductible; principal repayments are not
- Keeps more of your own cash in an offset against non-deductible debt (like your home loan)
- If you're building a portfolio, the freed-up cash lets you hold a buffer, which can also become the savings for your next deposit
The catch with interest-only
Lower repayments now come at a cost. You pay more interest over the life of the loan, the rate is usually a little higher, you're not building equity, and when the interest-only period ends the loan reverts to P&I over a shorter remaining term, so repayments can jump. Lenders also assess you against those higher future repayments, which can limit how much you borrow.
When P&I makes more sense
Principal & interest tends to win for a long-term hold: you usually get a lower rate, you build equity automatically (useful for your next deposit), and it's a forced savings plan. For an owner-occupied home, P&I is almost always the right call because that interest isn't deductible anyway.
The tax angle
The reason interest-only is popular with investors is that investment-loan interest is generally deductible against the rental income, the basis of negative gearing. But how much that benefits you depends on your income and situation.
The negative-gearing and CGT settings have changed and take effect from 1 July 2027. We've broken down exactly what changes in our guide to the negative gearing and CGT reforms. This isn't tax advice - confirm the detail with a registered tax agent before choosing.
Beyond IO vs P&I: offset, splits and ownership
Repayment type isn't the only structure decision. An offset account is a transaction account linked to the loan: every dollar sitting in it reduces the loan balance that interest is charged on, while staying fully accessible.
If you also have (or plan to have) a home loan of your own, where you park your savings can have real tax-planning consequences. That's worth raising with your accountant, and something we make sure is on the table.
Fixed or variable rates, loan splits (keeping portions of the loan separate) and redraw (pulling back extra repayments you've made) are the other pieces. They're all worth weighing against the same question: will this structure support your current purchase without unnecessarily limiting your future options?
The name or entity you buy in is a separate legal and tax decision. Speak with your accountant and solicitor or conveyancer before signing a contract, so the lending structure can be built around the ownership structure you've chosen.
Work out your numbers
See the repayment difference for your loan with the home-loan repayments calculator, check your limit with the borrowing-capacity calculator, or model the whole strategy with the investment property cash flow tool. When you're ready, a free discovery call with Scott sets the structure up right from day one.
Frequently asked questions
Is interest-only or P&I better for an investment property?
Neither is universally better; it depends on your strategy. Interest-only keeps repayments lower and preserves cash flow (and keeps the interest fully deductible), which suits investors focused on holding or buying more. Principal & interest builds equity and usually comes with a lower interest rate, which suits a long-term hold. In practice, many investors start on interest-only while they build an asset base they're happy with, then move to principal & interest to pay debt down later in the journey. The right answer is the one that fits your cash flow, tax position and goals.
What happens when an interest-only period ends?
Most interest-only periods run 1–5 years. At the end, the loan usually reverts to principal & interest over the remaining term, and because you're now repaying the principal over fewer years, repayments can jump noticeably. You may instead be able to roll over to a new interest-only term with your current lender, or refinance to another lender for a fresh interest-only term, subject to approval. Lenders test your ability to afford the higher P&I repayments up front, so plan for the step-up before you choose interest-only.
Last updated: July 2026
This article is general information only. It doesn't take into account your objectives, financial situation or needs, and it isn't credit, financial or tax advice. Figures are indicative estimates that vary by lender, state and property and can change, so we confirm your real numbers before you act. For tax questions, speak to a registered tax agent or accountant. Scott Lung, credit representative 567904 of Purple Circle Financial Services Pty Ltd (Australian Credit Licence 486112).
5 finance decisions to get right before buying your first investment property
- Build your first investment with a long-term property strategy.
- Understand the finance decisions that shape your borrowing power and future options.
- Make smarter decisions around your deposit, cash flow and loan structure before you sign a contract.
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