How Interest Only Home Loans Work
An interest-only (IO) loan means your monthly repayment only covers the interest charged on the outstanding loan balance — not the principal. The loan balance stays the same for the duration of the interest-only period.
| Principal & Interest | Interest Only | |
|---|---|---|
| Loan amount | $750,000 | $750,000 |
| Rate (p.a.) | 5.89% | 6.19% |
| Monthly repayment | $4,442 | $3,869 |
| Monthly saving | $573/month | |
| Balance after 5 years | ~$695,000 | $750,000 (unchanged) |
The cash flow benefit is clear — $573 per month saved. However, the loan balance does not reduce during the IO period, meaning you're not building equity through repayments (only through capital growth).
Use our Mortgage Repayment Calculator to compare IO vs P&I repayments on any loan size.
Why Investors Use Interest Only Loans
The primary reason investment property buyers choose IO is tax efficiency. The interest on an investment loan is fully tax-deductible. Principal repayments are not.
By maximising interest payments (IO) on the investment loan and minimising interest on the owner-occupied loan (which is not deductible), investors redirect their cash flow most effectively:
- IO on investment: Higher interest, but all deductible = lower after-tax cost
- P&I on owner-occupied: Pay down the non-deductible debt as fast as possible
This "debt recycling" strategy — reducing non-deductible owner-occupied debt while keeping deductible investment debt high — is one of the most well-established tax strategies for Australian property investors. Always discuss with your accountant before implementing.
Secondary reasons investors use IO: preserving cash flow for additional purchases, maintaining a larger loan for a set period to monitor the investment before committing to repayment, and flexibility to make or not make extra repayments as circumstances change.
IO Lending Rules in Australia: What Changed After 2017
APRA intervened significantly in IO lending in 2017, requiring banks to cap IO new lending at 30% of total residential lending (later removed in 2019) and to ensure proper assessment of borrowers' ability to repay under P&I terms after the IO period ends. Key current rules:
- Standard IO terms: Maximum 5 years for owner-occupiers; maximum 5–10 years for investors (lender-dependent)
- Stress test: Lenders assess your ability to service the loan at P&I repayments after the IO period ends — even though you're only paying IO now
- Rate premium: IO rates are typically 0.1–0.3% higher than equivalent P&I rates
- Renewal: IO periods can typically be renewed or extended at the end of the initial term, subject to lender reassessment
Which Lenders Offer the Best IO Rates for Investors in 2026?
IO investment rates vary significantly across the market in 2026. Non-bank lenders — Macquarie, ING, Athena — often offer more competitive IO rates than the major banks, particularly for loans above $500,000.
- Macquarie Bank: Consistently competitive IO investment rates, excellent for higher loan amounts
- ING: Strong digital experience, competitive IO pricing for standard investment properties
- Major banks (CBA, ANZ, NAB, Westpac): Rates negotiable through a broker but typically not as sharp as non-bank lenders on IO specifically
Always compare the comparison rate alongside the headline IO rate — fees can significantly affect the true cost. A mortgage broker compares IO rates across 50+ lenders at no cost to you. For current IO rate comparisons, visit our partners at Home Loans Hub.
IO Loans and the APRA DTI Rules in 2026
The new APRA DTI framework from February 2026 adds a new layer of complexity for IO investor applications. Many investors who carry IO investment loans will have high total debt relative to income (DTI above 6x), pushing their applications into the restricted quota bucket.
Non-bank lenders — not subject to APRA's capital requirements in the same way — may offer IO lending to investors who are above the 6x DTI threshold and being declined by banks. Your broker will identify which lenders can approve your specific situation.
When IO Makes Sense vs When P&I Is Better
- IO makes sense when: The property is an investment (deductible interest), you have non-deductible owner-occupied debt to pay down, cash flow is a priority, or you plan to sell within the IO period.
- P&I is better when: The property is owner-occupied (interest not deductible), you want to build equity, your cash flow is strong, or you are on a fixed income and want certainty.
- IO for owner-occupiers: Can make sense in specific circumstances — temporary cash flow stress, parental leave, business investment — but should be limited in duration. Long-term IO on an owner-occupied property is generally not recommended as you are paying rent-equivalent interest with no equity build.
Our Investment Loans guide covers IO structuring in detail. The Extra Repayments Calculator shows the impact of making additional payments during an IO period.
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📅 Book a Free Call Get in Touch →Frequently Asked Questions
Yes. Interest-only loans remain widely available in Australia, particularly for investment properties. Maximum IO periods are typically 5 years for owner-occupiers and 5–10 years for investors depending on the lender. Non-bank lenders often offer more competitive IO rates than the Big Four.
Yes. IO rates are typically 0.1–0.3% higher than equivalent P&I rates. However, the monthly repayment is lower during the IO period since you are only paying interest, not principal.
Most lenders offer IO periods of up to 5 years on investment loans, with some offering up to 10 years. The IO period can often be renewed after expiry, subject to a new credit assessment. Your broker can identify which lenders offer the longest IO periods with the best rates.
Yes. Interest paid on a loan used to purchase an investment property is tax-deductible in Australia under Section 8-1 of the Income Tax Assessment Act 1997. This is the primary tax reason investors prefer interest-only loans — maximising the deductible interest component. Always confirm with your accountant how this applies to your specific situation.
Yes, at any time. You can switch to P&I before the IO period ends, which will increase your monthly repayment but reduce your loan balance. Many investors switch to P&I as they approach retirement or when cash flow improves. Your broker or lender can arrange the switch without requiring a full refinance.