Using Interest‑Only vs P&I on Investment Loans the Smart Way

Interest‑only (IO) on an investment loan boosts cashflow and maximises gearing, while principal‑and‑interest (P&I) is safer, builds equity and usually tests better with banks. In 2026, with tighter APRA rules and looming negative gearing reforms, the right answer is rarely “IO forever” or “P&I only” – it’s a deliberate mix tied to a 5–10 year plan, buffers and your tax position.

Interest‑only boosts short‑term cashflow, while principal‑and‑interest steadily reduces risk and total interest.

Quick comparison: IO vs P&I for investors

Interest‑only (IO) means you pay just interest for a period (often 5 years), so the balance doesn’t fall.

P&I means every payment chips away at the loan, reducing future interest.

Indicative example (investment loan, $800,000, 6.5% p.a., 30‑year term):

• IO for 5 years: interest = about $4,333/month (no principal repaid).
• P&I from day one: about $5,060/month.

That’s roughly $700/month extra on P&I. But once the IO period ends, P&I repayments jump sharply because the remaining term is shorter – often 30–60% higher than the old IO payment.

For more on using IO without getting stuck with a “forever mortgage”, see Smart Ways To Use Interest‑Only Loans Without A Forever Mortgage.

How IO supercharges gearing – and risk

1. Gearing and cashflow

IO keeps repayments low, so:

1. You can borrow more for the same income (subject to APRA’s ~3% buffer on assessment rates).
2. You free up cashflow for other investments, business, or buffers.
3. Rental losses are often larger, so tax deductions can increase – although negative gearing benefits are being wound back for many post‑2026 established properties.

This higher gearing cuts both ways:

• Upside: more exposure if the property grows at, say, 5–6% p.a.
• Downside: bigger losses if values stall or fall, and more debt if rates or land tax rise.

2. IO, negative gearing and 2026–27 reforms

From the 2026–27 Federal Budget measures and the 2027 reform bill, many new established residential investments will have rental losses quarantined (limited offset against salary and other income).

That means:

• IO‑driven negative gearing benefits may be smaller or delayed.
• The old logic of “maximise IO to maximise tax deductions” is weaker, especially for high‑income PAYG and business owners buying after the transition dates.

P&I can therefore look more attractive because each repayment:

• Reduces non‑deductible risk long‑term (if you later turn that property into your home, for example).
• Builds equity you can redirect into business projects or new builds that may still enjoy more favourable rules.

See Negative vs positive gearing: the 10–20 year wealth reality check for how the new settings change the numbers.