When applying for a mortgage in Australia, one of the most important decisions is choosing between interest only vs principal & interest home loans. These two loan structures offer different benefits depending on your financial goals, whether you’re an investor or an owner-occupier.
In this guide, we’ll explore how each loan type works, their pros and cons, and how to decide which is best for your situation.
What Is a Principal & Interest Home Loan?
A principal and interest (P&I) home loan is the standard mortgage structure in Australia. Each repayment covers:
-
Principal – the amount borrowed
-
Interest – the lender’s charge for borrowing
With every repayment, your loan balance decreases and you build equity in your property. Most P&I loans run for 25–30 years, and if repayments are made consistently, the loan is fully paid off by the end of the term.
Learn more about on Ratebuster.
What Is an Interest Only Home Loan?
An interest only home loan allows you to pay just the interest for a set period—typically 1 to 5 years. During this time:
-
Repayments are lower
-
No principal is paid off
-
Equity does not grow
After the interest only period ends, the loan converts to a P&I structure, and repayments increase significantly.
Interest Only vs Principal & Interest Home Loans: Key Differences
| Feature | Interest Only | Principal & Interest |
|---|---|---|
| Repayments | Lower (initially) | Higher |
| Equity Growth | No equity during IO period | Builds equity from day one |
| Total Interest Paid | More over the life of the loan | Less overall interest |
| Loan Term | May extend due to IO period | Standard 25–30 years |
| Best For | Investors or short-term cash flow needs | Owner-occupiers and long-term buyers |
Pros and Cons of Interest Only Home Loans
Pros:
-
Lower repayments during the interest only period
-
Greater cash flow flexibility
-
Potential tax deductions on interest (for investment properties)
Cons:
-
No reduction in loan balance during IO period
-
Higher repayments after IO ends
-
More interest paid overall
-
Stricter lending criteria
Pros and Cons of Principal & Interest Home Loans
Pros:
-
Builds equity from the start
-
Less interest paid over time
-
Predictable repayments
-
Easier approval from lenders
Cons:
-
Higher repayments initially
-
Less flexibility for other investments
Choosing Between Interest Only vs Principal & Interest Home Loans
Your choice depends on your financial goals:
Owner-Occupiers
If you’re buying a home to live in, a principal & interest home loan is usually the better choice. You’ll build equity faster and benefit from lower interest rates.
Property Investors
An interest only home loan may suit investors who want to:
-
Maximise tax deductions
-
Maintain flexible cash flow
-
Sell before the IO period ends
However, lenders now apply stricter rules to interest only loans due to higher risk.
What Australian Banks Look For
To qualify for an interest only loan, lenders typically require:
-
Strong credit history
-
Higher income or rental yield
-
A clear repayment strategy
-
A capped IO period (usually 5 years)
For more on lending criteria, visit .
Final Thoughts on Interest Only vs Principal & Interest Home Loans
Choosing between interest only vs principal & interest home loans requires careful consideration of your financial discipline, risk tolerance, and long-term goals.
-
For long-term homeowners: P&I loans offer stability and equity growth
-
For short-term investors: IO loans may improve cash flow—if managed wisely
Always consult a mortgage broker or financial adviser before making a decision. The right advice can save you thousands over the life of your loan.
Need Help Choosing the Right Home Loan?
We can connect you with expert mortgage brokers who understand the Australian market and can help you compare:
-
Loan types
-
Interest rates
-
Lender policies
Start your journey with our and make an informed choice today.
