Compare the total cost of an interest-only loan versus a principal and interest loan. See how much more you pay in total interest with IO, and when IO might still make sense.
With an interest-only (IO) home loan, you pay only the interest charges for a set period (typically 1–5 years). During this time, your loan balance does not reduce at all. After the IO period expires, the loan converts to principal and interest (P&I) repayments, and you must repay the full original loan amount over the remaining term. This means higher monthly payments after the IO period ends, because you have the same debt but fewer years to repay it.
For example, a $600,000 loan at 6.5% on a 30-year term with a 5-year IO period means you pay $3,250/month for the first 5 years (interest only), then $4,216/month for the remaining 25 years. The P&I payment after IO is significantly higher than if you had been on P&I from the start ($3,793/month over 30 years).
For owner-occupiers, IO is almost always more expensive over the life of the loan. You build no equity during the IO period, you pay more total interest, and the payment shock when IO expires can be severe. If property values fall during your IO period, you may end up owing more than the property is worth (negative equity) with no equity buffer.
APRA has repeatedly tightened lending standards around IO loans because of these risks. Most lenders now assess IO applications at the P&I rate (not the IO rate), and IO periods are typically limited to 5 years with a maximum extension of 10 years.
On a $600,000 loan at 6.5% over 30 years, choosing a 5-year IO period costs approximately $95,000 more in total interest compared to P&I from day one. That is the true cost of lower payments in the first 5 years. Unless you are investing the difference at a return exceeding your mortgage rate (after tax), IO is a net loss for owner-occupiers.
You can have part of your loan on IO and part on P&I — our split loan calculator helps you model this.
Split Loan Calculator →