Interest-only vs principal and interest for investment loans

For an investment property, the choice between interest-only and principal and interest repayments comes down to more than which one costs less each month. It affects your cash flow now, the total interest you pay over time, and how large the jump is if and when the interest-only period ends. None of this is tax advice, since the tax treatment differs by situation and is worth discussing separately with your accountant.

What each option actually means

With principal and interest repayments, every payment reduces both the interest owed and the loan balance itself, so your equity builds steadily and the total interest paid over the loan’s life is lower. With interest-only repayments, you’re only covering the interest for a set period, commonly one to five years, which keeps monthly repayments lower but means the loan balance doesn’t reduce during that time.

Why investors often choose interest-only, at least for a while

Keeping repayments lower during an interest-only period frees up cash flow, which some investors use to build a deposit for a second property, cover other expenses, or simply manage a tighter budget while the property (hopefully) grows in value. Some use that freed-up cash flow specifically to fund a rentvesting strategy, buying where the numbers work while renting somewhere else entirely. It’s a deliberate cash flow strategy, not a way to avoid the cost of the loan altogether, since the total interest bill over the life of the loan ends up higher than it would with principal and interest from the start.

Some investors also point to the way interest is treated for tax purposes on an investment property as a reason to prefer interest-only, since the full repayment during that period is generally interest. This is exactly the kind of detail that depends on your personal tax position, so it’s worth a proper conversation with your accountant rather than assuming it works the same way for everyone.

Comparing the two directly

	Interest-only	Principal and interest
Monthly repayment	Lower during the interest-only period	Higher, but reduces the loan balance
Loan balance over time	Stays the same during the interest-only period	Steadily decreases
Total interest over the loan’s life	Higher overall	Lower overall
What happens after the set period	Repayments jump to principal and interest on the remaining term	No change, the structure is consistent throughout
Best suited to	Investors prioritising near-term cash flow	Investors prioritising building equity faster

The jump to watch for

The most common surprise with interest-only investment loans is the repayment increase once the interest-only period ends and the loan reverts to principal and interest, calculated over whatever term remains. Because the balance hasn’t reduced during the interest-only years, that remaining term is compressed into fewer years than the original loan term, which can make the jump larger than people expect. Ask your broker for the actual projected repayment figure once the switch happens, not just an estimate, so there are no surprises.

Some investors manage this by refinancing to a new interest-only term with a different lender once the original period ends, rather than accepting the switch to principal and interest. This can keep cash flow steady for longer, but it also means the loan balance keeps sitting at the same level for even longer, so it’s worth weighing against your longer-term plan for the property rather than treating it as a default move.

It’s worth revisiting the choice periodically rather than setting it once and forgetting about it, since your income, the property’s performance, and your broader portfolio plans can all shift the answer over time.

Making the choice deliberately

There’s no universally right answer here. It depends on your broader investment strategy, how comfortable you are with a future repayment jump, and how the tax treatment fits your overall financial position. A broker who works with investment property lending regularly can model both structures against your actual numbers and flag exactly when and how large that post-interest-only jump will be. Our methodology explains how we assess brokers on investment lending specifically, and our home page is a good place to start comparing.