Key takeaways
- An interest-only period, often five years, lowers your repayments because you pay nothing off the loan.
- When it ends, repayments jump, because the whole balance must be repaid over the shorter remaining term.
- Lenders assess you on principal and interest repayments over that remaining term, plus a 3 point buffer, so interest-only doesn’t raise your borrowing power.
- Interest on a loan used to buy a rental is generally deductible, but from 1 July 2027 losses on established properties bought after 12 May 2026 can’t reduce your wage income.
- Interest-only makes most sense with a clear plan: usually paying down a non-deductible home loan first.
An interest-only investment loan lets you pay just the interest for a set period, commonly five years, before switching to principal and interest. That keeps your repayments lower while the property settles in, and can free cash to pay down other debt. It also means your loan doesn’t shrink, you pay more interest overall, and repayments rise sharply later. Here’s how it works, what it does to your cash flow and tax, and when it makes sense.
How an interest-only investment loan works
During the interest-only period, each repayment covers only the interest charged on the balance. You pay nothing off the amount you borrowed. When the period ends, the loan converts to principal and interest, and the full balance has to be repaid over the years that are left. The rate on an interest-only loan can also be higher than on a principal and interest loan.
Moneysmart notes that many investors use interest-only loans. That’s partly about cash flow and partly about tax, which we cover below.
What interest-only does to your repayments
Hypothetical example
A $600,000 investment loan over 30 years at 6.50%:
- Principal and interest from day one: about $3,792 a month. After five years you’d have repaid about $38,300 of the loan.
- Five years interest-only: $3,250 a month, then about $4,051 a month for the remaining 25 years. That’s a jump of about $801 a month, and you still owe the full $600,000 when it happens.
- Total interest: about $45,100 more over the life of the loan with the interest-only period, at the same rate.
We used one rate for both options to show the effect of the structure alone. If the interest-only rate is higher, the gap grows.
How lenders assess an interest-only loan
Lower repayments don’t mean you can borrow more. APRA expects banks to check that you can afford principal and interest repayments over the term that’s left after the interest-only period, at your rate plus the serviceability buffer.
- Serviceability buffer
- At least 3 percentage points
- Assessed on
- Principal and interest over the remaining term
- Rental income
- Discounted by at least 20% in prudent practice
- Our example, as assessed
- About $5,242 a month (25 years at 9.50%)
APRA also says good practice is to place no reliance on future tax benefits from a rental loss. You can estimate your own position with our borrowing power calculator.
Weighing up interest-only for an investment?
Phillip can model both structures with your income, your home loan and your tax position, and compare lenders’ interest-only policies for you.
Interest-only and tax, including the 2026 changes
The ATO lets you claim interest on money borrowed to buy a rental property while it’s rented or available for rent. What counts is how the money was used, not whether the loan is interest-only. You can’t claim principal repayments, so interest-only keeps the deductible debt higher for longer.
That’s why investors who also have a home loan often choose interest-only on the investment and put every spare dollar into the home loan, whose interest isn’t deductible. An offset account on the home loan can do the same job while keeping your cash accessible.
For a new purchase of an established property, a loss that can’t reduce your wage income makes the cash flow of an interest-only loan more important, not less. Talk to your accountant before you choose.
When interest-only can make sense
Interest-only is a tool, not a default. It rarely helps if the investment is your only loan and you have no plan to use the money it frees up, because you simply pay more interest for longer. It tends to work when these apply:
- You have a home loan to pay down, and the money you save goes there or into an offset.
- You’re buying a new build or building, and want lower repayments during construction or while the property is leased up.
- You have a clear, written plan for the end of the interest-only period: sell, refinance or switch to principal and interest.
- You can already afford the principal and interest repayments with room to spare.
The risks to weigh
- You build no equity from repayments. If the property doesn’t rise in value, your equity is only the deposit you put in.
- Repayments jump when the period ends, and a rate rise on top can make that jump bigger.
- An extension isn’t guaranteed. APRA treats it as a material change that needs a fresh assessment.
- If prices fall and you need to sell, you may owe more than the property is worth.
Planning for the end of the interest-only period
Moneysmart’s advice is simple: work out the new repayment early and step up gradually. In our example, repayments rise by about $801 a month. Paying an extra $70 or so a month for a year before the switch gets you used to it. A few months out, ask your lender for a better rate or look at refinancing. If you can’t afford the new repayments, talk to your lender early.
Still deciding how to fund the purchase? Read buying an investment property with no deposit, or see how we help with investment property loans.
Frequently asked questions
Generally, yes, if you used the loan to buy the rental property and it’s rented or genuinely available for rent. The ATO looks at what the borrowed money was used for, not whether the loan is interest-only. You can’t claim principal repayments. If part of the loan was used for private purposes, such as a car, you must apportion the interest.
Moneysmart uses five years as its example, and that’s a common term. Each lender sets its own maximum, and APRA expects interest-only periods to be of limited duration, particularly for owner-occupiers. Whatever the length, the longer the period, the bigger the jump in repayments when it ends, because fewer years are left to repay the loan.
You can ask, but it isn’t automatic. APRA treats an extension as a material change to the loan, so the lender will do a fresh serviceability assessment based on principal and interest repayments over the remaining term. If your income, debts or the rate have changed, you may not qualify, so plan for the end of the period rather than relying on an extension.
Often, yes. Moneysmart notes that the rate on an interest-only loan could be higher than on a principal and interest loan, which adds to the extra interest you pay because the balance doesn’t fall. Investment loans can also be priced differently from owner-occupier loans, so compare the actual rate for your loan type rather than headline rates.
Generally not. Properties held at 7:30pm AEST on 12 May 2026, including those under an exchanged contract that hadn’t settled, can keep being negatively geared until sold. The limits apply to established residential properties bought after that time, from 1 July 2027. New builds keep full negative gearing. Check your own position with your accountant.
Sources
- Moneysmart: Interest-only home loans (opens in a new tab)
- Moneysmart: Buying an investment property (opens in a new tab)
- APRA: APG 223 Residential Mortgage Lending (opens in a new tab)
- ATO: Rental properties, interest expenses (opens in a new tab)
- ATO: Tax reform, reforming negative gearing and capital gains tax (opens in a new tab)
- Budget 2026–27: Negative Gearing and Capital Gains Tax Reform explainer (opens in a new tab)
This article is general information only and doesn't take your objectives, financial situation or needs into account. Figures and eligibility rules change; check the official sources above or talk to us before you act. Keystone Home Loans Pty Ltd ATF BEMA Family Trust, Credit Representative Number 564704 is authorised under Australian Credit Licence Number 384704.
Written by
Phillip Bui
Founder and Principal Mortgage Broker at Keystone Home Loans, based in Arncliffe, NSW. Accredited Mortgage Broker and Full Member of the Mortgage & Finance Association of Australia (MFAA).
