One of the first decisions property investors face when structuring a loan is whether to go interest-only (IO) or principal-and-interest (P&I). The right answer depends on your cash flow position, tax situation, hold horizon, and how close you are to the end of any existing IO period. This article unpacks how each structure works, what the indicative rate difference looks like in 2026, what APRA's IO restrictions mean for your approval, and when P&I is actually the better choice.
The Key Difference: What You're Actually Paying
The distinction is straightforward. On an interest-only loan, your monthly repayment covers only the interest charged on the outstanding balance. The loan balance itself does not reduce — at the end of a five-year IO period on a $600,000 loan, you still owe $600,000. On a principal-and-interest loan, each repayment covers both the interest charge and a portion of the principal, so the balance reduces over time and is fully paid off by the end of the loan term.
The practical effect: IO repayments are lower in the short term, because you are not repaying any principal. P&I repayments are higher from day one, but you are steadily building equity as you go.
Why Many Investors Prefer Interest-Only
Three factors make IO structurally attractive for investment property.
Cash flow. Lower repayments free up cash that can be deployed elsewhere — into an offset account on your owner-occupied home loan, reinvested, or simply held as liquidity. For investors managing multiple properties, the repayment reduction across a portfolio can be meaningful.
Tax deductibility. Interest on an investment loan is generally tax-deductible to the extent the property is used to produce assessable income. Principal repayments are not deductible — they are a return of capital, not an expense. An IO structure maximises the deductible portion of your repayment, which is particularly valuable for investors in the 37% or 45% marginal tax brackets. Note that deductibility depends on your specific circumstances — verify with your tax adviser.
Capital allocation strategy. Some investors prefer to direct surplus capital toward paying down a non-deductible home loan (their principal place of residence) rather than an investment property. IO on the investment side, with surplus cash flowing into a home loan offset, can be tax-effective — the interest saved on the home loan is not income and therefore not taxable, while investment interest deductions remain intact.
Indicative Rates in 2026
IO investment loans typically carry a rate premium over equivalent P&I investment loans. As indicative benchmarks in mid-2026, IO investment rates are running around 6.44% p.a., compared with approximately 6.19% p.a. for P&I investment — a spread of roughly 0.25 percentage points at the tighter end of the market, and up to 0.50 percentage points at the wider end.
On a $600,000 loan over 30 years, the indicative monthly comparison looks like this:
| Loan type | Rate (indicative) | Monthly repayment | Balance after 5 years |
|---|---|---|---|
| Interest-only (5-year IO period) | 6.44% p.a. | $3,220 | $600,000 (unchanged) |
| Principal-and-interest (30 years) | 6.19% p.a. | $3,661 | ~$561,000 |
These figures are indicative only. Your actual rate will depend on your LVR, lender, loan size, and credit profile. Use the LenderBridge Residential Investment Calculator to model your specific scenario across both IO and P&I structures.
APRA's IO Restrictions: What Lenders Apply
Since APRA tightened IO lending standards in 2017 and reinforced serviceability standards in subsequent years, a number of constraints apply that investors need to understand before applying.
IO term limits. Most lenders cap IO periods at five years for investment loans, though some will extend to ten years for borrowers with strong profiles and lower LVRs. At the end of the IO term, the loan automatically converts to P&I for the remaining term — and the repayment jump can be significant (see below).
Serviceability buffer. APRA requires lenders to assess all new loans — including IO investment loans — at the contracted rate plus a 3% serviceability buffer. So if the IO rate is 6.44%, lenders assess you as if the rate were 9.44%. This is applied to the P&I repayment that would apply after the IO period ends, not the lower IO repayment during the IO term. This materially reduces assessed borrowing capacity relative to what the current repayment level might suggest.
LVR sensitivity. IO investor loans become harder to approve as the LVR increases. Most lenders apply full standard IO terms up to 80% LVR; above 80% LVR, IO may be unavailable or subject to additional conditions. Lenders mortgage insurance (LMI) is typically required above 80% LVR and some LMI providers impose their own IO restrictions.
Portfolio exposure. If you already hold multiple IO investment loans, some lenders will treat your total IO exposure as a risk factor and apply more conservative assessment to any new application. The more IO debt you carry, the more scrutiny the next application will attract.
When P&I Is the Better Choice
IO is not always the right structure. P&I is often better in the following circumstances.
You converted your PPOR to an investment. If you have moved out of your principal place of residence and are now renting it out, the existing home loan — now an investment loan — is generally deductible. However, if you have an offset account against that loan, drawing down the offset to purchase a new home will reduce the deductible debt. Switching to P&I on the investment property in this scenario may not be optimal — seek tax advice specific to your structure before deciding.
You have a long hold horizon and want equity. If you are holding a property for 20-plus years and not planning to sell in the near term, building equity through P&I repayments strengthens your balance sheet and reduces refinancing risk at the end of each IO term. Equity growth also expands your borrowing capacity for future acquisitions.
Your marginal tax rate is low. The tax deductibility argument for IO weakens significantly at lower marginal rates. An investor in the 19% bracket (taxable income $18,201–$45,000) saves only 19 cents per dollar of interest, compared with 47 cents (including the Medicare levy) for someone in the top bracket. For low-income earners, the cash flow benefit of IO may not outweigh the rate premium and the lack of equity accumulation.
You want the lowest total interest cost. P&I reduces the balance over time, which reduces the interest charged in subsequent periods. Over a full 30-year term, a P&I borrower will pay significantly less total interest than an IO borrower at the same or similar rate, even accounting for the IO rate premium being lower. IO is a cash flow and tax tool, not a way to minimise total borrowing costs.
The IO Cliff: What Happens When IO Ends
The most significant risk in an IO structure is the repayment jump at the end of the IO period. When a five-year IO term expires on a 30-year loan, the remaining 25 years become a P&I schedule — compressed from 30 years. The repayment required to amortise the outstanding balance over the shorter remaining term is substantially higher than either the IO repayment or the original P&I schedule.
On a $600,000 loan at 6.44% with a five-year IO period and 30 years total:
| Phase | Monthly repayment | Notes |
|---|---|---|
| Years 1–5 (IO period) | $3,220 | Interest only on $600,000 at 6.44% |
| Years 6–30 (P&I revert) | $4,434 | P&I on $600,000 over 25 remaining years at 6.44% |
| Jump at IO expiry | +$1,214 per month | A 37.7% increase in the monthly repayment |
A $1,214 per month increase on a single property is material. Investors holding multiple IO loans that expire around the same time face a compounding version of this — sometimes called the "IO cliff." Planning for the revert date is not optional; it should be built into your cash flow modelling before you take out the IO loan in the first place. The LenderBridge Rate Stress Test can help you model what a rate or repayment shock looks like against your current income and expenses.
What Lenders Assess on IO Investor Applications
Lenders applying APRA's serviceability standards to an IO investor loan will generally assess the following:
- Income level and stability. Employment type (PAYG or self-employed), income level, and whether rental income from the subject property and existing portfolio is included — typically at 80% of gross rent to allow for vacancy and costs.
- LVR. Standard IO investor products are generally available up to 80% LVR. Above 80%, the product set narrows and conditions become more restrictive. Genuine savings history is assessed more carefully at higher LVRs.
- Existing IO exposure. Lenders will look at your total IO debt across all properties, not just the application in front of them.
- Revert serviceability. The P&I repayment that applies after the IO period — assessed at the buffer rate — is the figure used in the serviceability calculation, not the lower current IO repayment.
For a full breakdown of how lenders calculate what you can borrow, see How Borrowing Power Is Calculated in Australia. For the tax dimension of investment lending, see Negative Gearing Explained.
Model Your Scenario
The LenderBridge Residential Investment Calculator lets you run side-by-side IO and P&I comparisons for your specific loan size, rate, and term. It models the IO cliff repayment, cumulative interest cost across both structures, and the equity position at any given point in the loan — useful inputs before you decide which structure suits your situation.
Frequently Asked Questions
Can I have interest-only on multiple investment properties?
Yes, subject to lender approval. Most lenders will assess each loan individually and consider your total IO exposure across your portfolio. Lenders with significant IO book concentration may apply additional scrutiny or cap the number of IO facilities they will approve for a single borrower. APRA's serviceability requirements apply to each facility — you need to demonstrate you can service all loans at P&I rates at expiry, not just the one being applied for.
Will choosing interest-only hurt my borrowing capacity?
In most cases, yes — at least marginally. When you apply for any new loan, lenders assess your existing IO loans at the higher P&I repayment that would apply at end of the IO period (not just the current IO repayment). This P&I assessment figure is higher than the actual IO repayment you're making, which reduces the assessed surplus available to service a new loan. The effect is most pronounced on large IO balances with short remaining terms.
Can I switch from interest-only to P&I mid-term?
Generally yes. Most lenders allow you to switch from IO to P&I before the IO period ends, either by requesting a variation or by refinancing. Switching early can make sense if your income has increased, your tax position has changed, or you want to start building equity sooner. There is usually no penalty for switching to P&I early, though some lenders may charge a loan variation fee. Switching back from P&I to IO mid-term is harder — it is typically treated as a new IO application and subject to current serviceability assessment.
General information only, not credit assistance, tax advice, or financial product advice. LenderBridge connects borrowers and lenders; it does not advise or recommend. Tax deductibility of interest depends on your individual circumstances — verify with a registered tax agent or accountant. Rates quoted are indicative only and will vary by lender, LVR, and borrower profile. Check figures with your lender before making any borrowing decision.