Interest only or principal and interest?
With principal and interest, every repayment pays the interest and some of the loan, so what you owe falls from the start. With interest only, you pay just the interest for a set time, usually up to five years, so the repayment is lower but the loan doesn't shrink. When the interest-only period ends, the repayment jumps, and over the life of the loan you pay more interest.
What each costs, in dollars
An illustration, not a quote: a $600,000 loan over 30 years at 6.00% a year, the same rate throughout.
| Principal and interest | Interest only for 5 years, then principal and interest | |
|---|---|---|
| Repayment, years 1–5 | about $3,597 a month | $3,000 a month |
| Owed after 5 years | about $558,300 | $600,000 |
| Repayment, years 6–30 | about $3,597 a month | about $3,866 a month |
| Total interest over 30 years | about $695,000 | about $739,700 |
Five years of interest only saves about $597 a month at first, and costs about $44,700 more in interest over the loan. Real rates differ, and interest-only rates are often higher than principal-and-interest ones, which widens the gap.
The step-up when interest only ends
This is the part that catches people. When the interest-only period ends, the whole loan has to be repaid over the years that are left, so the repayment rises above what principal and interest would have cost from the start. In the example, it goes from $3,000 to about $3,866 a month, an increase of about $866, overnight.
You can ask to extend the interest-only period, but it's a new application: the lender assesses you again, at its rules on the day, and may say no.
When lenders allow interest only
Lenders are stricter about interest only. Many set a lower maximum loan size against the property's value than for principal and interest. CommBank's lending policy, for example, allows interest only up to 80% of the value on a home you live in, and up to 90% on an investment, with lenders mortgage insurance above 80% (read 3 October 2026). A loan that would be approved at 90% on principal and interest may not be on interest only.
Lenders also test whether you could afford the higher repayment once interest only ends, over the shorter term left, at a rate at least 3 percentage points above the one you'd pay. That can lower how much you can borrow.
When each one can make sense
Interest only can suit a short period of lower repayments, such as while building, during parental leave, or bridging between homes, and some investors who want to keep repayments down and have a clear plan for the loan. How interest is treated for tax on an investment is a question for your accountant.
Principal and interest usually suits a home you live in, anyone who wants the loan to shrink from the start, and anyone who'd struggle with the step-up. It costs less in interest over the loan and builds equity from the first repayment.
When interest only is the wrong choice
The step-up would stretch you. If you couldn't comfortably pay the higher repayment in five years, it's a problem deferred, not solved.
Values fall. With nothing paid off, a drop in value takes more of your equity, and you may have less to fall back on to refinance.
You're relying on an extension. It's a new application, not a right.
You want to own the home outright. Every interest-only year is a year the loan doesn't shrink.
Interest only questions
Principal and interest repayments pay the interest and part of the loan, so what you owe falls from the start. Interest-only repayments cover just the interest for a set period, so they're lower, but the loan doesn't shrink and the repayment rises when the period ends.
Weighing up interest only?
Tell me the loan, the property's value, your income and why interest only appeals. I'll show you the repayments both ways, the step-up, and which lenders would allow it.
You'll hear back within the hour in business hours, and by 9am the next business day after hours.
Sources
- 1
CommBank's lending policy, maximum loan-to-value ratios: interest only up to 80% on a home you live in; up to 90% on an investment, with lenders mortgage insurance. Read 3 October 2026.
- 2
APRA, serviceability buffer of at least 3 percentage points, expected since the end of October 2021. Read 29 September 2026.
- 3
Repayments and interest: Money Brain's arithmetic on the stated example (standard monthly repayment formula, 6.00% a year, monthly compounding).
Updated 3 October 2026