Guide
Interest-only vs principal and interest: which suits an investment loan?
Interest-only repayments are lower, but the debt doesn't fall and the rate is usually higher. Here's how the two loan types compare on cash flow, total cost and risk, with worked numbers at today's rates.
By Mossy Taheri, licensed buyer’s agent · Updated
The short answer
On a $600,000 investment loan, interest-only repayments are about $3,825 a month versus about $4,134 for principal and interest, but the debt stays at $600,000. When a 5-year interest-only period ends, repayments rise to about $4,376 a month. Interest-only frees up cash flow; P&I builds equity and costs less overall.
The numbers side by side
A $600,000 loan over 30 years. Principal and interest at 7.35%; interest-only at 7.65%, assuming a 0.3-point premium, which varies by lender. Rates as at 6 November 2026.
| Principal and interest | Interest-only (first 5 years) | |
|---|---|---|
| Monthly repayment | $4,134 | $3,825 |
| Owed after 5 years | $566,852 | $600,000 |
| Monthly repayment from year 6 | $4,134 | $4,376 (P&I over the remaining 25 years) |
When interest-only can make sense
- You have a home loan too, and would rather put spare cash against that non-deductible debt.
- You need lower repayments for a few years, for example while on parental leave or building a buffer.
- You're buying for growth and plan to review the loan before the interest-only period ends.
When principal and interest makes more sense
- You want the debt to fall and equity to build regardless of what the market does.
- You don't have a home loan to pay down instead.
- The interest-only rate is meaningfully higher than the P&I rate you're offered.
Tax
Interest on an investment loan is generally deductible; repaying principal isn’t. Interest-only keeps the deductible interest higher, but that only helps if the property is a good investment. Ask your accountant how the 2027 negative gearing changes affect you. See the negative gearing calculator.
Risks to weigh
- Repayments jump when the interest-only period ends, and lenders may not extend it.
- If values fall, you have no principal repaid to cushion the loan.
- You pay more interest over the life of the loan.
General information only, not credit or financial advice. Compare actual offers with a broker.
Working out the right loan for an investment?
Book a free discovery call. We'll model the property's cash flow with you and your broker before you buy.
Book a free discovery callInterest-only vs P&I: common questions
Is interest-only better for investment properties?
It can suit investors who want lower repayments to free up cash flow, or who'd rather pay down a non-deductible home loan first. It costs more over the life of the loan, the rate is usually higher, and the debt stays the same until the interest-only period ends.
How long can an interest-only period be?
Usually up to 5 years for an investment loan, and with some lenders up to 10. After that the loan switches to principal and interest over the remaining term, so repayments jump.
Are interest-only rates higher?
Usually. Lenders typically charge more for interest-only investment loans than for principal and interest loans, often by several tenths of a percentage point. Compare the actual rates you're offered.
Is the principal part of a repayment tax deductible?
No. On an investment loan, the interest is generally deductible, but repaying principal isn't. That's one reason some investors choose interest-only on the investment and put spare cash against their home loan instead.
General information only. It doesn’t consider your personal circumstances and isn’t financial, tax, credit or legal advice. Speak to a licensed professional before you act.