What is the difference between interest-only and principal and interest?

With principal and interest (P&I) repayments, each repayment covers the interest charged plus a slice of the loan balance, so the debt shrinks over time. With interest-only (IO) repayments you only pay the interest for a set period (often 1 to 5 years), so the balance does not reduce at all. When the IO period ends, the loan switches to P&I over the remaining, shorter term — which lifts repayments noticeably.

Is interest-only cheaper?

Interest-only is cheaper month to month during the IO period because you are not paying down any principal. Over the full life of the loan it is more expensive: you pay interest on the full balance for longer and then clear that balance over fewer years, so total interest is higher than going straight onto principal and interest. Lenders also often charge a slightly higher rate on IO loans.

Who should use an interest-only loan?

Interest-only loans are most common with property investors, where the interest can be tax deductible and the lower repayments improve short-term cash flow. They are riskier for owner-occupiers, who build no equity during the IO period and face a sharp repayment jump when it reverts to P&I. ASIC MoneySmart suggests owner-occupiers think carefully before choosing interest-only and consider whether they can afford the higher repayments later.

Interest-Only vs Principal & Interest Calculator

Compare interest-only and principal-and-interest home loan repayments and the true total cost of an interest-only period.

Last verified: 5 May 2026

Does interest-only actually cost more?

Yes. Interest-only lowers your repayment in the short term, but because you pay down no principal during the IO period you pay thousands more in total interest and then face a higher repayment when the loan reverts to principal and interest. Source: ASIC MoneySmart.

Worked example. On a $600,000 loan at 6.2% over 30 years, standard P&I is about $3,675 a month. Paying interest-only for the first 5 years drops that to roughly $3,100 a month — but repayments then jump to about $4,049 a month, and you pay tens of thousands more interest across the loan.

General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.

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Does interest-only actually cost more?

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