Interest-Only vs Principal & Interest Calculator
Compare the monthly repayments and total cost of an interest-only loan versus a principal-and-interest loan. See the cash-flow trade-off and the long-term cost. This is an estimate only and does not constitute credit advice or an offer of credit.
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A calculator applies one formula. Lenders apply their own, and they disagree with each other. Send us what you worked out and we will tell you how it looks against real lender policy.
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How this is calculated
The calculator compares two scenarios side by side. In the principal-and-interest (P&I) scenario, the standard amortisation formula is used to work out the monthly repayment that pays off the loan over the full term. In the interest-only (IO) scenario, the monthly repayment is simply the loan amount multiplied by the monthly interest rate — no principal is repaid during the IO period.
After the IO period ends (typically 1–5 years), the loan reverts to P&I for the remaining term. Because the principal hasn't reduced during the IO period, the remaining term is shorter, so the reverted P&I repayment is higher than it would have been on the original term. The calculator shows this reverted repayment.
The extra total interest figure shows how much more interest you pay with the IO structure compared to P&I for the full term — because the principal stays at its full amount during the IO period, interest is charged on a higher balance for longer. This is the real cost of the lower initial repayments.
What this doesn't account for
- Rate differences. Some lenders charge a higher rate for IO loans than P&I loans — sometimes 0.2–0.4 percentage points. This calculator uses the same rate for both. If your IO rate is higher, the cost difference is even larger.
- Rate changes. Variable rates move. The model holds the rate constant, but in reality the rate during and after the IO period will differ.
- Borrowing capacity. IO loans are assessed more strictly by lenders, and some reduce your borrowing capacity or require a lower LVR. APRA-imposed limits on IO lending have made it harder to get IO approval for owner-occupier loans.
- Tax implications. For investment loans, IO can be tax-effective because the interest is deductible and the principal repayment is not. This calculator doesn't model tax outcomes — talk to your accountant.
- Equity build-up. With P&I, you build equity through principal reduction. With IO, you rely entirely on market growth for equity — if prices fall, you could owe more than the property is worth.
Common questions
Most commonly for investment loans, where the interest is tax-deductible and maximising the deductible portion can be beneficial. It can also make sense temporarily — for example, during a career break, maternity leave, or a period of reduced income — where lower repayments help cash flow. It's rarely the right choice for an owner-occupier loan long-term, because you pay more interest and build no equity.
During the IO period, the principal hasn't reduced at all. When the loan reverts to P&I, the full original loan amount must be paid off over the remaining years — which is fewer than the original term. A shorter term with the same principal means higher monthly repayments. For example, a 30-year loan with a 5-year IO period reverts to a 25-year P&I loan, which has higher repayments than a 30-year P&I loan.
It's possible but harder than it was. APRA restrictions led most lenders to limit IO lending to around 30% of new loans, and to apply stricter serviceability assessments. Most IO loans are now for investment purposes. If you need IO for an owner-occupier loan, we can tell you which lenders on our panel will consider it and under what circumstances.
Many IO loans allow extra repayments (within limits for fixed-rate). If you can afford to, paying down principal during the IO period reduces the reverted P&I repayment and the total interest. Even small additional payments can make a meaningful difference. Check whether your loan has a redraw facility so you can access those extra funds if needed.
Not sure which structure is right for you?
We'll explain the trade-offs and find the right loan structure for your situation — free, no obligation.