The repayment type on your home loan significantly affects your monthly repayments, your tax position if you are an investor, and how quickly you reduce your debt. Here is a clear explanation of both options and when each makes sense.
With a principal and interest loan, each repayment covers the interest charged for that period plus a portion of the loan balance itself. Over the life of the loan, your balance reduces progressively until the loan is fully repaid at the end of the term.
For owner-occupiers, principal and interest is almost always the right structure. You are building equity with every repayment, and interest rates are typically lower than on interest-only loans. Most lenders offer competitive rates specifically to attract owner-occupiers on P&I terms.
With an interest-only loan, your repayments cover only the interest charged each period. The loan balance does not reduce — you owe exactly the same amount at the end of the interest-only period as you did at the start.
Interest-only periods are typically available for 1 to 5 years on investment loans, and sometimes for owner-occupiers in specific circumstances. At the end of the interest-only period, the loan reverts to principal and interest repayments — and because the term has shortened without reducing the balance, repayments increase.
For investment properties, interest-only loans are commonly used because the interest component is tax deductible, whereas principal repayments are not. Paying interest only maximises the tax-deductible expense and preserves cash flow.
However, interest-only loans on investment properties carry higher rates than P&I loans, and the balance never reduces — meaning you are entirely reliant on capital growth for your return. The right structure depends on your tax position, cash flow needs, and investment time horizon. Lendology works alongside your accountant to recommend the right approach.
Interest-only loans are occasionally used by owner-occupiers — for example, during a period of financial stress, while managing a cash flow constraint, or as part of a specific financial strategy. Lenders are more restrictive about offering interest-only to owner-occupiers than to investors, and rates are typically higher.
If you are considering interest-only as an owner-occupier, it is important to understand that your equity is not growing during this period — which matters if you later want to use that equity for another purpose.
Not necessarily. It depends on your tax rate, cash flow position, and investment strategy. Some investors prefer P&I from the outset to progressively reduce debt. Lendology models both scenarios before recommending a structure.
Yes, usually without penalty. Some borrowers start interest-only and switch to P&I when their cash flow improves. We can coordinate this switch with your lender.
Your loan reverts to P&I repayments calculated over the remaining term. Because the balance has not reduced, these repayments will be higher than if you had been paying P&I from the start. We factor this into cash flow planning for investment clients.
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