20–40%
Typical repayment increase at IO expiry
3–5 yrs
Standard IO period length
10 yrs
Maximum total IO period at most lenders
IO vs P&I: Understanding the Difference
Interest-Only (IO) means your repayments cover only the interest charges — no principal is paid down. The loan balance stays the same throughout the IO period. Principal and Interest (P&I) means every payment reduces your loan balance plus covers the interest.
Worked Example:
Loan balance: $700,000 | Rate: 6.5% | Original loan term: 30 years
IO repayment (years 1–5): $700,000 × 6.5% ÷ 12 = $3,792/month
P&I repayment at expiry (25 years remaining): $700,000 at 6.5% over 25 years = $4,709/month
Payment shock: +$917/month (+24%)
The full balance must now be repaid over a compressed 25 years instead of 30.
Loan balance: $700,000 | Rate: 6.5% | Original loan term: 30 years
IO repayment (years 1–5): $700,000 × 6.5% ÷ 12 = $3,792/month
P&I repayment at expiry (25 years remaining): $700,000 at 6.5% over 25 years = $4,709/month
Payment shock: +$917/month (+24%)
The full balance must now be repaid over a compressed 25 years instead of 30.
What Triggers a Forced Switch
Your IO period expiry is the most common trigger. Others include:
- APRA policy changes: Regulatory tightening can force lenders to limit IO lending
- Property type or purpose change: Converting an investment property to your primary residence may trigger P&I requirements
- LVR exceeds limit: If property values fall and LVR exceeds 90%, some lenders require a switch to P&I
- Hardship variation: Some hardship arrangements include a mandatory P&I switch condition
Your Options at IO Expiry
| Option | Eligibility | Rate Change | Repayment Impact | Best For |
|---|---|---|---|---|
| Switch to P&I | All borrowers automatically | Usually lower IO→P&I rate at most lenders | Increases 20–40% | Owner-occupiers; debt reduction focus |
| Extend IO | Must reapply; serviceability assessment | IO rate usually slightly higher than P&I rate | Stays same as now | Investors maintaining cash flow |
| Refinance to new lender | Standard refinance eligibility | New rate at market; can negotiate | Depends on rate and term | Better rate + IO extension available |
| Switch lender + extend IO | Refinance eligibility + IO approval | Competitive market rate | May reduce from current IO rate | Investors wanting lower rate AND IO continuity |
The "Payment Shock" Calculation
Use this calculation to prepare for your IO expiry:
Step 1: Find your remaining loan term (original term minus IO period used)
Step 2: Calculate P&I repayment: use a mortgage calculator with your current balance, current rate, and remaining term
Step 3: Subtract your current IO repayment from the P&I repayment
Step 4: Test: Can your current income and cashflow absorb the difference?
IO Investors: The Tax vs Equity Trade-Off
For investment properties, the IO vs P&I decision has important tax implications:
| Factor | IO Investment Loan | P&I Investment Loan |
|---|---|---|
| Interest deductibility | 100% of repayment is interest → 100% deductible | Only the interest portion deductible; principal portion is not |
| Loan balance | Stays the same — maximises deductible debt | Reduces over time — deductible debt decreases |
| Cash flow | Lower repayments → better weekly cash flow | Higher repayments → lower cash flow |
| Equity building | No equity built during IO period | Equity builds each month |
| Capital gains tax (at sale) | Same — CGT based on sale price vs acquisition cost | Same |
The investor strategy: Many property investors maintain IO on investment properties while making extra P&I repayments on their owner-occupied home (non-deductible debt). This maximises deductible interest and fastest reduces the non-deductible debt. Discuss with your accountant.
Frequently Asked Questions
Typically 20–40%. On a $700,000 loan with 22 years remaining, the switch could add $600–$900/month. The exact increase depends on your loan balance, rate, and remaining term.
Yes, but it requires a new application assessment. Your lender will reassess income, expenses, and serviceability. Most lenders cap total IO periods at 10 years. Investment property IO extensions are generally easier to get than owner-occupier extensions.
IO maximises cash flow and preserves deductible debt. P&I builds equity but reduces your interest deduction over time. Most investors prefer IO during the growth phase and switch to P&I as they approach retirement. Get your accountant's advice on the tax implications.
Your loan automatically switches to principal and interest repayments. The repayment is calculated based on the remaining loan balance and remaining term. If you had 5 years IO on a 30-year loan, you now have 25 years to pay off the full principal — making each repayment significantly higher.
When lenders assess borrowing capacity for a new property, they use your P&I repayment as the existing commitment — even if you're currently paying IO. Switching to P&I means your actual repayments now match what lenders were already using in calculations.
IO Period Ending? Get a Plan Now
We'll calculate your payment shock, model an extension vs refinance comparison, and advise the best path for your investment strategy.
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