Interest-only loans can improve an investor’s returns when they free up cash to pay down non-deductible debt, build an offset buffer or fund another purchase. They don’t make a property more profitable on their own: you pay more interest over the life of the loan, usually at a higher rate, and repayments jump when the interest-only period ends. On a $600,000 loan at 6.89%, repayments rise from $3,445 to about $4,199 a month when a five-year interest-only period ends.
How an interest-only loan works
For a set period, usually up to five years, you pay only the interest. The balance doesn’t fall unless you make extra repayments or use an offset. When the period ends, the loan switches to principal and interest over the remaining term, so repayments rise. See our guide to the interest-only loan.
| $600,000 loan at 6.89% | Interest-only for 5 years, then principal and interest | Principal and interest for 30 years |
|---|---|---|
| Repayment, first 5 years | $3,445 a month | $3,948 a month |
| Repayment after 5 years | $4,199 a month (over 25 years) | $3,948 a month |
| Total interest over the loan | About $866,000 | About $821,000 |
| Extra interest | About $45,000 | Nil |
Our calculations, at the 6.89% average investor variable rate (Canstar, 2 October 2026) for both loans. Interest-only rates are often higher, which widens the gap.
When interest-only makes sense
- You also have a home loan. Paying interest-only on the investment loan and putting the difference into your home loan or its offset reduces non-deductible debt first. This is the most common reason investors choose interest-only.
- You’re building a portfolio. Lower repayments can help serviceability and preserve cash for the next deposit, though lenders assess interest-only loans over the shorter principal and interest period.
- Cash flow is tight for a period, for example during a renovation, parental leave or the early years of a business.
- You plan to sell within a few years, and want to minimise holding costs.
Using interest-only with an offset
An interest-only loan with an offset account gives you the flexibility of lower required repayments and the interest saving of paying the loan down, without locking money into the loan. Every dollar in the offset reduces interest, and the loan balance, and its deductibility, stays intact. If your circumstances change, the cash is still available.
Tax considerations
Interest on a loan used for an investment property is generally deductible against the property’s income. Interest-only keeps the deductible balance higher for longer, which some investors prefer, but the deduction never outweighs the cost: you still pay a dollar of interest to save the tax on it.
From 1 July 2027, losses on established residential property bought after 7.30 pm AEST on 12 May 2026 can only be offset against residential property income and gains, not your salary. For those properties, a larger interest bill no longer reduces tax on your wages. See how to structure loans for tax.
Risks to plan for
- Payment shock. Repayments rise by about $754 a month on our example when the interest-only period ends, more if rates have risen.
- No equity build-up. If prices fall, you may owe more than you can sell for.
- Higher rates. Interest-only investor rates are usually higher than principal and interest.
- Extensions aren’t guaranteed. Lenders reassess you at the end of the period and may decline to extend.
Model your cash flow at the post-interest-only repayment and at higher rates before you commit.
Planning your exit
Six to twelve months before the interest-only period ends, decide whether to switch to principal and interest, ask for an extension, refinance or sell. If you’ve been building an offset, you may be able to reduce the balance before the switch so the jump is smaller. If you’re thinking about fixing at the same time, see fixed vs variable for investors.
Frequently asked questions
Why do investors choose interest-only loans?
Mainly to keep repayments low so they can pay down their non-deductible home loan faster, hold a cash buffer, or keep money available for the next purchase. Interest-only doesn’t reduce the total cost of the loan; it changes when you repay the principal.
Can I extend my interest-only period?
Often, but it isn’t automatic. Lenders will reassess your income, expenses and the property’s value, and may approve an extension, offer a new interest-only period on a refinance, or require you to move to principal and interest. Start the conversation six to twelve months before the period ends.
Is interest-only better with an offset account?
It’s usually the most flexible combination. You pay only the interest required, while money in the offset reduces the interest charged as if you’d paid the loan down. The cash stays available, and the loan balance stays intact for tax purposes on an investment loan.
Sources
- ASIC Moneysmart, Interest-only home loans
- Canstar, Average home loan interest rates, as at 2 October 2026
- Australian Taxation Office, Interest expenses on rental properties
- Australian Government, Negative Gearing and Capital Gains Tax Reform, Budget 2026-27
General information only. It does not consider your objectives, financial situation or needs and is not credit, tax or financial advice.