Interest‑Only vs P&I on Investment Loans

Key Takeaway

For Australian investors, interest‑only (IO) investment loans maximise short‑term cashflow and gearing, while principal‑and‑interest (P&I) loans reduce risk and build equity faster. After recent RBA rate rises and 2026–27 Federal Budget reforms that will restrict negative gearing on many established properties, repayments can jump 30–60% when IO terms expire. Investors should model both IO and P&I at current rates plus a 3% APRA buffer and align their choice with a clear 5–10 year gearing and tax strategy.

Interest‑only (IO) on an investment loan boosts cashflow and maximises gearing, while principal‑and‑interest (P&I) is safer, builds equity and usually tests better with banks. In 2026, with tighter APRA rules and looming negative gearing reforms, the right answer is rarely “IO forever” or “P&I only” – it’s a deliberate mix tied to a 5–10 year plan, buffers and your tax position.

Diagram comparing interest‑only and principal‑and‑interest investment loan repayments over time. Interest‑only boosts short‑term cashflow, while principal‑and‑interest steadily reduces risk and total interest.

Quick comparison: IO vs P&I for investors

Interest‑only (IO) means you pay just interest for a period (often 5 years), so the balance doesn’t fall.

P&I means every payment chips away at the loan, reducing future interest.

Indicative example (investment loan, $800,000, 6.5% p.a., 30‑year term):

IO for 5 years: interest = about $4,333/month (no principal repaid).
P&I from day one: about $5,060/month.

That’s roughly $700/month extra on P&I. But once the IO period ends, P&I repayments jump sharply because the remaining term is shorter – often 30–60% higher than the old IO payment.

For more on using IO without getting stuck with a “forever mortgage”, see Smart Ways To Use Interest‑Only Loans Without A Forever Mortgage.

How IO supercharges gearing – and risk

1. Gearing and cashflow

IO keeps repayments low, so:

You can borrow more for the same income (subject to APRA’s ~3% buffer on assessment rates).
You free up cashflow for other investments, business, or buffers.
Rental losses are often larger, so tax deductions can increase – although negative gearing benefits are being wound back for many post‑2026 established properties.

This higher gearing cuts both ways:

Upside: more exposure if the property grows at, say, 5–6% p.a.
Downside: bigger losses if values stall or fall, and more debt if rates or land tax rise.

2. IO, negative gearing and 2026–27 reforms

From the 2026–27 Federal Budget measures and the 2027 reform bill, many new established residential investments will have rental losses quarantined (limited offset against salary and other income).

That means:

IO‑driven negative gearing benefits may be smaller or delayed.
The old logic of “maximise IO to maximise tax deductions” is weaker, especially for high‑income PAYG and business owners buying after the transition dates.

P&I can therefore look more attractive because each repayment:

Reduces non‑deductible risk long‑term (if you later turn that property into your home, for example).
Builds equity you can redirect into business projects or new builds that may still enjoy more favourable rules.

See Negative vs positive gearing: the 10–20 year wealth reality check for how the new settings change the numbers.

P&I: safer, slower gearing but easier to sleep on

P&I typically gives you three big wins: 1. Lower risk over time – your debt falls every month. 2. Lower lifetime interest – you’re not paying 30 years of interest on the same balance. 3. Often better with banks – P&I usually passes serviceability more comfortably, particularly for investors with multiple properties. Using the same $800,000 example at 6.5%: - 5‑year IO + 25‑year P&I after: total interest over 30 years can be tens of thousands more than straight 30‑year P&I. - If rates rise to 8.5% (roughly a 2%…

Frequently asked questions

Is interest‑only still worth it with negative gearing changes?▾

It can be, but mainly for cashflow and flexibility rather than tax benefits. With many established properties losing full negative gearing from 2026–27, the logic of maximising IO purely for deductions is weaker. IO now only makes sense if it supports a clear, time‑limited strategy and you maintain strong buffers to manage refinancing and rate‑rise risk.

How long should an interest‑only period be on an investment loan?▾

For most investors, three to five years is the practical upper limit, and only if there is a defined purpose such as stabilising a business or funding a renovation. Longer IO periods increase total interest costs and refinancing risk, especially if rates rise or lending rules tighten. A clear exit plan back to P&I or a sale is essential before starting an IO term.

Should I prioritise P&I on my home or investment property first?▾

Usually you prioritise paying down your non‑deductible home loan first because that delivers the biggest after‑tax benefit. However, this must be balanced against maintaining adequate cashflow and business buffers. If aggressive P&I on the home would strain your budget or business, a more gradual approach with some IO on investments and measured P&I on the home may be safer.

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Using Interest‑Only vs P&I on Investment Loans the Smart Way