Interest-Only Investment Loans
Interest-only investment loans let you pay just the interest for 1-5 years, freeing up cash flow for renovations, the next deposit, or life. Andy structures them so you keep maximum flexibility and tax deductions without locking yourself into a repayment you don’t need yet.
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Why Investors Choose Interest-Only
- Lower monthly repayments — Pay only the interest portion — typically 30-40% less than principal-and-interest repayments on the same loan.
- Maximum tax deductibility — The full repayment is interest, which means the full amount is typically tax-deductible for investment properties.
- Cash flow for growth — The difference between interest-only and P&I can fund renovations, holding costs, or the deposit on your next property.
- Offset-compatible — Park surplus cash in an offset account to reduce interest without paying down the deductible loan balance.
What is an Interest-Only Investment Loan?
An interest-only loan is structured so that for a set period — usually 1, 2, 3, or 5 years — you pay only the interest charged each month, not the principal. The loan balance stays the same throughout the interest-only period.
At the end of that period, the loan typically converts to principal-and-interest repayments automatically, unless you apply to extend the interest-only term (subject to the lender’s serviceability review at the time).
For investors, the appeal is simple: lower repayments mean better cash flow. If the property is neutrally or positively geared, or if you’re using the cash flow difference to fund another investment, interest-only can be a practical structure.
Example: a $500,000 investment loan at 6.5% p.a. on a 30-year term would cost around $3,160 per month on principal-and-interest. Interest-only, the repayment drops to roughly $2,710 per month — a saving of $450 per month, or $5,400 per year. That difference can cover holding costs, strata fees, or part of the next deposit.
Interest-only loans are available on fixed and variable rates, and most lenders allow you to attach an offset account. The loan is still secured against the property; you’re just deferring the principal repayment component, not eliminating it.
Interest-Only vs Principal-and-Interest: The Numbers
Here’s how the repayments compare on a $500,000 investment loan at 6.5% p.a. over a 30-year term, with a 5-year interest-only period.
| Loan structure | Monthly repayment (Years 1-5) | Monthly repayment (Years 6-30) | Total interest paid (30 years) |
|---|---|---|---|
| Interest-only (5 years) | $2,708 | $3,454 | $653,420 |
| Principal-and-interest (full term) | $3,160 | $3,160 | $637,500 |
The interest-only structure costs roughly $450 less per month for the first five years, then reverts to a higher repayment than the original P&I figure because you’re repaying the same principal over a shorter remaining term (25 years instead of 30). Over the life of the loan, you pay more total interest — in this example, around $16,000 more.
But total interest paid isn’t the only measure. If you used the $450/month saving to fund a renovation that lifted the property value by $60,000, or to cover holding costs while building equity in a second property, the strategy delivered a return that more than offsets the extra interest cost. The key question is: what are you doing with the cash flow difference?
How an Interest-Only Investment Loan Works
Choose Your Interest-Only Term
Most lenders offer 1, 2, 3, or 5-year interest-only periods. Shorter terms are easier to approve; longer terms give you more cash flow runway but require stronger serviceability.
Decide Fixed or Variable
You can fix the rate during the interest-only period for certainty, or keep it variable for flexibility and offset access. Some investors split the loan—part fixed interest-only, part variable with offset.
Set Up an Offset if You Want One
An offset account lets you park surplus cash to reduce the interest charged without reducing the deductible loan balance. Most variable interest-only loans allow offsets; fixed loans typically don’t.
Repay Interest Monthly
Each month you pay only the interest portion. The loan balance stays constant. If you make extra repayments into an offset or redraw, you reduce interest without affecting the principal.
Revert or Renew at Term End
At the end of the interest-only period, the loan converts to principal-and-interest unless you apply to extend. Lenders reassess your income, property value, and loan-to-value ratio before approving an extension.
What Interest-Only Investment Loans Cost
Interest-only loans for investment properties typically sit 0.10-0.30% higher in rate than principal-and-interest loans with the same lender, depending on your loan-to-value ratio and the lender’s risk settings at the time.
As of mid-2025, variable interest-only rates for investment loans in WA range from around 6.3% to 7.1% p.a. for borrowers with a loan-to-value ratio under 80%. Fixed interest-only rates for 1-3 year terms sit in a similar range, though fixed rates move with wholesale funding costs and can be higher or lower than variable depending on the cycle.
Lenders assess interest-only applications more conservatively than P&I — they calculate serviceability at the principal-and-interest rate plus a buffer (typically 3%), even though you’ll be paying interest-only. That means you need to demonstrate you can afford the revert before the loan is approved.
There are no specific extra fees for choosing interest-only; application fees, valuation fees, and settlement costs are the same as any investment loan. Some lenders charge a small fee (around $150-$300) if you apply to extend the interest-only period at the end of the initial term.
Common Questions about Interest-Only Investment Loans
Yes, most lenders allow you to apply for an extension, but it’s not automatic. They’ll reassess your income, the property value, and your loan-to-value ratio. If your LVR has dropped (because the property has increased in value or you’ve paid down other debts), and your income still services the loan comfortably, extensions are usually approved. Typical extension terms are another 1-5 years.
No — the benefit of interest-only is that you’re only required to pay the interest each month. But if you want to reduce the loan balance, most lenders let you make additional repayments into a redraw facility or offset account (depending on the loan structure). Those extra payments reduce interest without locking the funds away.
If your income or circumstances change and you can’t service the higher P&I repayment, your options are: extend the interest-only term (if the lender agrees), refinance to another lender with a longer interest-only period, sell the property, or restructure the loan (for example, releasing equity or consolidating other debts to improve cash flow). The key is to plan for the revert at the start — don’t assume your income or the property’s cash flow will stay the same.
Interest-only works well for both. For negatively geared properties, it keeps the cash shortfall smaller, so you’re not tipping in as much each month to cover the gap between rent and expenses. For positively geared properties, it maximises the surplus cash flow you can use elsewhere. The strategy depends on what you’re doing with the difference — if you’re reinvesting it or holding it as a buffer, interest-only makes sense. If you’re just spending it, principal-and-interest might be a better forced savings mechanism.
Yes, but it’s treated as a loan variation and the lender reassesses your serviceability. It’s easier to start interest-only and switch to P&I later (which you can usually do at any time without re-approval) than to go the other way. If you think you might want interest-only at any stage, set it up that way from settlement.
Most major lenders do, but their maximum interest-only terms and LVR limits vary. Some lenders cap interest-only at 80% LVR; others go to 90% (with LMI). A broker can show you which lenders are competitive for interest-only at your LVR and whether they allow offsets, longer terms, or easier extensions.
Yes — for investment properties, the interest portion of your loan repayments is typically tax-deductible as a cost of earning rental income. Because interest-only loans have no principal component, the full repayment is deductible (subject to ATO rules and your accountant’s advice). That’s one of the main reasons investors choose interest-only: it maximises the deduction each year.
Yes, lenders approve interest-only loans for first-time investors as long as your income and deposit meet their serviceability requirements. You’ll need at least a 10% deposit (plus costs) and steady income. If you’re using equity from your home as the deposit, interest-only on the investment loan can help keep your overall repayments manageable.
Reviewed by
Credit Representative & Mortgage Broker
The information on this page has been reviewed for accuracy by Andy Iriks, a Credit Representative & Mortgage Broker at Wanna Finance. It is general information only.
