Interest‑Only vs Principal‑and‑Interest Loans

Most Australian home loans require principal‑and‑interest repayments: you gradually repay the amount you borrowed and pay interest on the remaining balance. With interest‑only loans, you pay only the interest for an initial period (often 1–5 years) and repay the principal later.

Pros and cons of interest‑only loans

• Lower repayments initially:  Useful if you’re renovating or expect income to rise.

• Higher long‑term cost:  Moneysmart warns that interest‑only periods mean you pay more interest overall and your loan balance doesn’t reduce.

• Harder to build equity:  If property values fall, you could owe more than the property is worth when the interest‑only period ends.

  
  

Principal‑and‑interest loans

• Build equity:  You’re steadily reducing your loan balance.

• Lower interest cost over time:  Because your principal decreases, you pay less interest each year.

• Greater repayment:  Requires a bigger cash flow commitment upfront.

  
  

Decision points

Investors sometimes choose interest‑only loans for tax reasons or to maximise cash flow for further investments. Owner‑occupiers generally benefit from paying principal and interest. Discuss with your broker and tax adviser which structure suits your goals.