What each one does
On interest only (IO), your repayment covers the interest and nothing else. The balance stays where it started. IO periods are usually limited to a set number of years (often up to five for investment loans), after which the loan switches to principal and interest over the remaining term.
On principal and interest (P&I), each repayment covers the interest and a slice of the loan. The slice is small at first and grows over time.
The cost of each, worked through
Our example loan, used across this site. These are illustrative assumptions, not a quote:
- Loan: $520,000 (a $650,000 house with a 20% deposit)
- Rate: 6.2%, held constant for simplicity (real rates move)
| Structure | Monthly repayment | A year |
|---|---|---|
| Interest only | $2,687 | $32,240 |
| P&I over 30 years | $3,185 | $38,218 |
| P&I over 25 years (after 5 years IO) | $3,414 | $40,971 |
After rent and running costs, using the figures in what a property really costs to hold each week, that's roughly $248 a week on IO, $363 on 30-year P&I, and $416 once a five-year IO period ends and the loan converts to P&I over the remaining 25 years.
The repayment jump
That last line is the one people underestimate. When the IO period ends, you don't just start paying principal. You start paying it over fewer years, because the five IO years came out of the original 30.
In this example the monthly repayment rises from $2,687 to $3,414: an increase of about $728 a month, or 27%, on the same loan at the same rate. If rates have risen in the meantime, the jump is bigger. Some borrowers can refinance or extend IO at that point; some can't, because their income or the lender's policies have changed. It's worth knowing your plan for that date before you start.
Over the life of the loan, IO also costs more in total. In this example, five years IO followed by 25 years P&I costs about $665,000 in interest, against about $627,000 for 30 years of P&I from the start. That's roughly $39,000 more, in return for lower repayments early on.
The rate premium
Lenders generally charge investors more than owner-occupiers, and generally charge IO investment loans more than P&I investment loans. The gap varies by lender and changes over time, so we won't quote a figure here. A mortgage broker can show you current pricing for both structures side by side. Even a small premium compounds on a $520,000 balance.
Serviceability
When a lender assesses an IO loan, it typically tests whether you could afford the P&I repayments over the shorter remaining term, plus a buffer above the actual rate. That can reduce how much you can borrow compared with an equivalent P&I loan. If you're planning to borrow again later for your own home, how this investment loan is structured will affect that second application. Your broker is the person to model it.
Offset accounts
An offset account is a transaction account linked to the loan. Money sitting in it reduces the balance that interest is charged on, without reducing the loan itself.
For someone investing first, an IO loan with an offset can be a flexible pairing. Cash in the offset saves interest at the loan's rate, but the loan balance stays intact. If that cash is later needed for the deposit on your own home, it hasn't been used to pay down the investment debt.
Thinking about the home you'll buy later
Here's why the structure matters for a home buyer, in general terms. Whether loan interest is tax deductible generally depends on what the borrowed money was used for, not on which property secures it. Interest on money borrowed to buy a rental is generally deductible. Interest on your own home loan generally isn't.
So if you pay down the investment loan and later borrow more for your home, you may have swapped deductible debt for non-deductible debt. Paying extra off a loan and then redrawing it for private use can also blur the picture. Keeping spare cash in an offset rather than paying the loan down is one way people keep the options open. Whether that's right for you, and how it interacts with your situation, is a question for your accountant before you set the loan up, not after.
The 2026 changes add a twist. For established residential property acquired after 7:30pm AEST on 12 May 2026, from 1 July 2027 rental losses can only be offset against residential property income and gains, with unused losses carried forward. So deductible interest still counts, but it may not reduce tax on your salary in the year you pay it. Your accountant can tell you how it applies to you. The detail is in our guide to the 2026 tax changes.
Where this fits
The loan structure is part of the plan, not an afterthought. Our guide on whether to invest before you buy your own home covers how holding costs and growth work together, and the cashflow tool in our calculators shows IO and P&I side by side for any loan you enter. For the loan itself, speak to a mortgage broker.
General information only. Nothing on this site takes into account your objectives, financial situation or needs, and it is not financial, credit, tax or legal advice. Past performance is not a reliable guide to future performance.