With a standard principal and interest (P&I) loan, every repayment covers some interest and chips away at the loan balance. With an interest-only loan, your repayments during the interest-only period cover only the interest - the loan balance stays the same.
For example, on a $500,000 loan at 6.00%, monthly interest-only repayments would be approximately $2,500. Principal and interest repayments on the same loan over 30 years would be approximately $3,000. That is a difference of around $500 per month during the interest-only period - but the trade-off is that you are not reducing your debt.
When the interest-only period expires, your repayments increase - often significantly - because you now need to repay the full loan amount over a shorter remaining term. Lendology always models both phases so you understand the full picture before committing.
Interest-only loans are most commonly used by property investors. The lower repayments free up cash flow, and the interest on an investment loan is generally tax-deductible. By keeping the loan balance higher, investors maximise their deduction.
Some owner-occupiers use interest-only loans for short-term cash flow management - for instance, during a renovation or career transition - but this is less common. Lendology compares 60+ lenders to find the right structure for your goals, whether that is building equity fast or optimising cash flow.
The key difference is long-term cost. An interest-only loan costs more in total interest over the life of the loan because you delay paying down the principal. However, the lower short-term repayments can be strategically valuable for investors or borrowers with specific cash flow needs.
Lenders also assess interest-only applications more conservatively. They typically use a higher assessment rate and may require a lower LVR (loan-to-value ratio). Your Lendology broker will explain exactly how each option affects your borrowing capacity.
Jason and Steve are Adelaide mortgage brokers who give honest advice at no cost to you. No obligation.
The information on this page is general in nature and does not constitute financial advice. Given Finance Pty Ltd (t/a Lendology) ACN 624 144 501 is authorised under LMG Broker Services Pty Ltd ACL 517192.