One of the most important decisions when setting up a home loan is choosing your repayment type — Principal & Interest (P&I) or Interest-Only (IO). Each has clear pros and cons, and the right answer depends on whether the loan is for a home you live in or for an investment property.
How P&I Repayments Work
With P&I, every monthly repayment covers two things:
- The interest charged for that month
- A portion of the principal — reducing your loan balance
Over the life of the loan (usually 25–30 years), your balance gradually reduces to zero.
How IO Repayments Work
With IO, your monthly repayment only covers the interest. The principal balance doesn't reduce — you owe the same amount at the end of the IO period as you did at the start.
IO terms are usually limited to 5 years. After that, the loan automatically converts to P&I, often at a higher rate, and your repayments increase significantly.
Side-by-Side Comparison
| Feature | P&I | Interest-Only |
|---|---|---|
| Monthly repayment | Higher | Lower |
| Loan balance | Reduces over time | Stays the same |
| Total interest paid | Lower | Higher |
| Interest rate | Lower (typically) | Higher (0.1–0.3%) |
| Best for | Owner-occupiers | Investors, short-term cash flow |
Why Investors Often Choose IO
Investment property interest is generally tax deductible. Investors using IO can:
- Maximise tax deductions (interest fully deductible, principal isn't)
- Free up cash flow to fund the next deposit
- Direct surplus cash into their non-deductible owner-occupied loan instead
This is a strategic choice — not laziness. The cash that would have paid down the deductible investment debt is used to reduce non-deductible debt instead.
Not sure which repayment type suits you?
We'll review your situation and recommend the structure that fits your goals — owner-occupier or investor.
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Why Owner-Occupiers Should Usually Choose P&I
For your own home, IO doesn't deliver the same advantages:
- Interest isn't tax deductible
- Lender pricing penalises owner-occupier IO loans
- You don't build equity, so you can't leverage it later
The only common reason for owner-occupier IO is short-term cash flow — e.g. parental leave, a temporary income drop, or a renovation period.
The IO "Cliff"
When your IO period ends, repayments don't just go up — they go up sharply. A $600,000 IO loan at 6.5% costs about $3,250/month. When it converts to P&I over the remaining 25 years, repayments jump to about $4,050 — a 25% increase.
Many investors plan around this by refinancing to extend the IO period before it expires. But lender appetite for IO has tightened — APRA limits how much new IO lending lenders can write.
Can You Make Extra Repayments on Either?
Yes. Both loan types usually allow extra repayments, though some fixed-rate loans cap how much extra you can pay per year.
For investors using IO, an offset account can simulate the benefits of extra repayments without reducing the loan balance — preserving deductibility while still saving interest.
Get the right repayment structure
P&I or IO — we'll model both for your situation and recommend the cleanest structure.