Published 28 September 2026. Figures and market conditions described here were current at that time and may have changed since.
With the cash rate tipped to rise, property investors are paying more attention to interest-only loans as a way to manage cash flow while rates remain elevated.
Interest-only lending is a specific product with some advantages in certain situations and risks in others. Here are four things worth understanding before you decide whether it is the right structure for you.
How interest-only repayments actually work
On a standard principal and interest loan, each repayment reduces the outstanding loan balance while also covering the interest charged for that period. On an interest-only loan, repayments cover only the interest.
The principal balance does not get paid down during the interest-only period, which means the loan balance at the end of year five, for example, is the same as it was at the start. This keeps monthly repayments lower during the interest-only period but leaves the full principal to be repaid once that period ends.
Who interest-only loans tend to suit
Interest-only loans are most commonly used by property investors. Where the loan interest is tax-deductible, keeping repayments as interest-only maximises the deductible portion of each payment. Investors may also prefer to direct surplus cash toward other investments rather than reducing a debt that is working in their favour from a tax perspective.
For owner-occupiers, interest-only loans are less common and typically used in specific circumstances. Lenders assess these applications more conservatively, and the rationale needs to be clear.
What happens when the interest-only period ends
Interest-only periods are fixed in duration, typically between one and five years for investors and up to five years for owner-occupiers, subject to lender policy. When the period ends, the loan reverts to principal and interest repayments calculated over the remaining loan term.
Because no principal has been repaid, the remaining loan term is shorter relative to the full balance, which pushes repayments up when the loan converts. On a $600,000 loan with a five-year interest-only period, the full balance remains to be repaid over the remaining 25 years. Planning for that repayment increase well in advance is important.
How lenders assess interest-only applications differently
Lenders apply stricter serviceability tests to interest-only loans than to principal and interest loans. Because the borrower will eventually need to repay the full principal over a shorter remaining term, lenders typically assess the borrower's capacity to service the loan on principal and interest terms from the outset, even during the interest-only period. This can reduce the amount a borrower is able to access compared to a standard principal and interest structure.
Not all lenders offer interest-only terms to all borrower types, and the rate is typically slightly higher than an equivalent principal and interest loan, which is worth factoring into any comparison.
A mortgage broker can help you compare your options across lenders who offer interest-only products.
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