$597 a month. That's what going interest-only shaves off the repayments on a $600,000 loan at an illustrative 6.00% variable rate. Tempting, after the year rates have had. The catch: the loan doesn't shrink by a cent, and when the interest-only window closes, your repayment jumps higher than if you had never taken the break.
The interest only vs principal and interest question has one honest answer: it depends on whose debt it is. On your own home, interest-only is usually a $45,000 deferral dressed up as relief. On an investment property, used deliberately, it can be the structure that gets your home paid off years sooner.
Timing sharpens the choice. The RBA lifted the cash rate in February, March and May 2026, held it at 4.35% in June, and meets again on Tuesday 11 August 2026. Repayments are biting, which is exactly the phase of the cycle when interest-only enquiries climb. Rising rates do hand buyers less competition and more room to negotiate, but they punish loose structure. Run the maths before you sign anything.
What actually changes when you go interest-only?
A principal and interest loan does two jobs with each repayment: it covers the month's interest, then chips away at what you owe. An interest-only loan does the first job only. For a set window, usually one to five years, you pay the interest and the balance sits still.
On a $600,000 loan over 30 years, assuming an illustrative 6.00% variable rate throughout (not a quoted offer; actual rates and comparison rates vary by lender as at July 2026):
| Principal and interest | Interest-only for 5 years, then P&I | |
|---|---|---|
| Starting repayment | $3,597/month | $3,000/month |
| Balance after 5 years | About $558,300 | Still $600,000 |
| Repayment from year 6 | $3,597/month | $3,866/month |
| Total interest over 30 years | About $695,000 | About $740,000 |
Two rows do the damage. The balance row: five years of repayments, and you still owe the lot. And the year-6 row: the debt must now clear itself in 25 years instead of 30, so the repayment lands $866 a month above where the interest-only years let you sit. Lenders call this the reversion. Borrowers tend to call it a shock. Most lenders also price interest-only a little higher than principal and interest, which the table above ignores in your favour.
Interest-only on your own home: why is it usually a mistake?
Because the debt is non-deductible, the deferral buys nothing back. Interest-only on your own home is paying the meter while the car stands still: you hand the lender $180,000 of interest over five years, own no more of your house than the day you settled, then face repayments $866 a month higher in whatever rate environment year six delivers.
You've been sold interest-only as breathing room. It isn't. It's a $45,000 loan extension with the fee spread over 25 years.
There are honest short-term uses: parental leave, a construction build, bridging between homes. But if flexibility is the real goal, pay principal and interest and hold your surplus in an offset instead. Same daily interest saving, the buffer stays yours, no cliff waiting in year six. Our offset account explained guide covers the mechanics, and offset vs redraw settles where that buffer should live.
Why do investors run interest-only on purpose?
Because after tax, not all debt costs the same. Interest on a loan for an income-producing property is generally deductible against the rent under the ATO's purpose test. Interest on your own home is not. A spare dollar therefore works harder against your home loan than against your investment loan, sometimes 30 to 47 cents in the dollar harder, depending on your marginal rate.
Interest-only turns that logic into a structure. Pay the minimum on the deductible investment debt, point the freed-up cash at the non-deductible home debt or its offset. Total debt falls just as fast. Its composition improves every month. That composition shift is half the engine behind negative gearing and the whole engine behind debt recycling.
One 2026 caveat, followed through. From 1 July 2027, the May 2026 federal budget quarantines losses on established properties bought after 12 May 2026: you can no longer claim the loss against your salary, but it stays deductible against your residential property income, including gains, and unused losses carry forward. New builds keep full negative gearing, and negative gearing on holdings bought before 12 May 2026 is grandfathered. Interest on an established rental you buy today stays deductible against the rent. The composition play below survives untouched. The deliberate big-loss, big-refund play does not, unless you buy new.
Renee's $600,000 question: same debt, two structures
Renee is a project manager in Joondalup, in Perth's north, where Cotality's June 2026 figures put prices up 23.9% year on year. She owes $400,000 on her home and is settling a $600,000 loan on an investment townhouse in Midland. Same illustrative 6.00% rate on both, to isolate the structure.
Path A: both loans principal and interest. Repayments total $5,995 a month. After five years she owes roughly $372,200 on the home and $558,300 on the townhouse. Total debt: about $930,500.
Path B: home stays principal and interest, townhouse goes interest-only. The townhouse costs $3,000 a month, and the freed-up $597 goes straight into her home loan. After five years she owes roughly $330,600 on the home and the full $600,000 on the townhouse. Total debt: about $930,600.
The gap: total debt is identical to within a hundred dollars. Composition isn't. Path B carries about $41,600 more deductible debt and $41,600 less non-deductible debt, which at 6.00% is roughly $2,500 a year of extra interest the ATO lets her claim, worth about $925 a year at a 37% marginal rate. And because the home loan keeps shrinking faster, that gap compounds every year the structure runs.
Based on typical scenarios. Individual outcomes vary.
Will interest-only shrink your borrowing power?
Usually, yes, and it catches people off guard. A lender doesn't assess a five-year interest-only loan on the $3,000 repayment you'll actually make. It assesses the principal and interest repayment over the remaining 25 years, with APRA's 3% serviceability buffer stacked on top. At 6.00%, that means being tested on roughly $5,035 a month at 9.00% over 25 years, about $200 a month harder than the same loan written as principal and interest over 30. We've watched borrowers choose interest-only to ease their cash flow and shrink their approval in the same stroke.
APRA's debt-to-income caps, live since 1 February 2026, tighten the same screw: no more than 20% of a lender's new loans can sit at six times income or above, and interest-only investors often land exactly there.
The same test returns at the cliff. When your interest-only term ends, extending it or moving lender means passing a fresh assessment at that day's rates plus 3%. If the numbers have drifted against you, the barrier isn't your current bank; it's the new lender's calculator. The Wity Borrowing Power Assessment models your position across 45+ lenders before you commit to a structure, not after, and if a looming reversion is the problem, refinancing sorted early beats a repayment jump absorbed late.
Interest only vs principal and interest: which should you pick?
There's no universal winner, but your situation usually points one way.
| Your situation | Lean towards |
|---|---|
| Owner-occupier, no investment debt | Principal and interest |
| Need short-term breathing room | P&I plus an offset buffer first |
| Investor still paying off your own home | Interest-only on the investment debt |
| Investor with the home paid off | P&I often wins; the tax case fades |
| Borrowing near your ceiling | Principal and interest, for the assessment |
| Building a portfolio deliberately | Interest-only, structured loan by loan |
That fourth row matters. Once the non-deductible home debt is gone, the composition play loses its other half, and interest-only's $45,000 lifetime cost starts counting against you again.
Structure like this belongs in the loan design, not in a tick-box at settlement. The WityLoanPlan, the digital proposal your Wity broker builds before anything goes to a lender, sets it out loan by loan: which split runs interest-only and for how long, where the freed-up cash gets pointed, what the repayment becomes at reversion, and what the whole arrangement does to your borrowing power. Versioned, digitally accepted, and yours to pull apart before you commit. If the investment property itself is still hypothetical, start with our first investment property guide.
Weighing up a structure, or staring down an interest-only cliff on your current loan? Tell us your situation → and we'll model both paths. Free, and you'll leave with the numbers either way.