Interest Only Calculator
Compare interest-only and principal & interest repayments side by side, including the payment shock when you switch.
How Interest-Only Home Loans Work in Australia
How it works
During an interest-only (IO) period, your repayments cover only the interest accruing on the loan — none of the principal is paid down. This means your loan balance stays the same throughout the IO term. For a $600,000 loan at 6.5%, the IO repayment is roughly $3,250/month compared to about $3,793/month for principal and interest (P&I) — a saving of around $543/month.
The trade-off comes when the IO period ends, typically after 1 to 5 years. At that point, the full original balance must be repaid over the remaining term. If you took a 30-year loan with a 5-year IO period, you now have only 25 years to repay the principal — meaning your P&I repayments will be higher than if you had been paying P&I from the start. This is commonly referred to as payment shock, and it can be substantial.
In Australia, interest-only loans are most commonly used by property investors because the interest on an investment loan is tax-deductible, and keeping the principal high maximises the deduction. For owner-occupiers, lenders and APRA's macroprudential guidelines have made IO loans harder to obtain — most lenders limit IO terms to 5 years for owner-occupiers and assess serviceability at the P&I rate (plus a buffer) rather than the IO rate.
When to use this calculator
- You're a property investor comparing the cashflow benefit of IO repayments against the cost of paying more interest over the loan life
- You want to see the exact payment shock — the increase in repayments when your IO period ends and you switch to P&I
- You're deciding on an IO period length (1, 2, 3, or 5 years) and want to compare the total interest cost of each
- You want to model whether the money saved during the IO period, if invested elsewhere, would outperform the extra interest paid
- You're approaching the end of an IO period and want to understand what your new P&I repayments will be
Key concepts
- Payment shock
- The jump in repayments when an interest-only period ends. Because the full principal must now be repaid over a shorter remaining term, the P&I repayment after IO expiry is always higher than it would have been with a P&I loan from the start. On a $600,000 loan with a 5-year IO period, the increase can be $400–$700/month.
- APRA serviceability buffer
- The Australian Prudential Regulation Authority requires lenders to assess your ability to repay at a rate at least 3 percentage points above the loan's interest rate. For IO loans, lenders must also assess you at the P&I repayment — not the lower IO amount — which is why IO loans can be harder to qualify for.
- Negative amortisation risk
- Interest-only loans don't reduce the principal, so you build no equity through repayments. If property values fall during the IO period, you could end up owing more than the property is worth (negative equity). This is a key risk for borrowers who choose IO at high loan-to-value ratios.
- IO for investors vs owner-occupiers
- Investors use IO loans to maximise tax-deductible interest and free up cash for other investments. Owner-occupiers get no tax benefit from IO — they simply defer principal repayments, pay more total interest, and risk payment shock. Most lenders charge a 0.10%–0.30% rate premium on IO loans for owner-occupiers.
Worked example — 5-year IO period on a $650,000 investment loan
Tom takes out a $650,000 investment loan at 6.50% over 30 years with a 5-year interest-only period.
| Period | Repayment type | Monthly repayment | Principal paid |
|---|---|---|---|
| Years 1–5 | Interest only | $3,521 | $0 |
| Years 6–30 | P&I (25 years remaining) | $4,399 | $650,000 |
Comparison with P&I from day one:
| P&I (30 years) | IO 5 years + P&I 25 years | |
|---|---|---|
| Monthly (years 1–5) | $4,110 | $3,521 |
| Monthly (years 6–30) | $4,110 | $4,399 |
| Payment shock at year 5 | — | +$878/month |
| Total interest paid | $829,569 | $906,288 |
| Extra interest cost | — | $76,719 |
During the IO period, Tom saves $589/month in cashflow ($4,110 − $3,521). Over 5 years, that's $35,340 he can direct toward other investments or offset against the loan. However, the total interest cost is $76,719 higher than P&I from day one. Whether IO is worthwhile depends on whether Tom's marginal tax deductions and alternative investment returns exceed this cost.
Interest-Only Loan FAQ
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