How to Shift Investment Loans from Interest‑Only to P&I Safely

Switching an investment loan from interest‑only (IO) to principal‑and‑interest (P&I) can easily lift repayments by 30–60%. Done without a plan, that jump can smash your household budget, drain business cashflow and force rushed decisions like selling at the wrong time.

This guide walks you through how IO to P&I switches work in Australia, how to model the impact on your numbers, and practical ways to restructure or stage changes so you keep control of cashflow.

1. What actually changes when you move from IO to P&I?

An interest‑only investment loan means you’re only paying the interest charged on the balance for a set period (often 5 years), then the loan automatically reverts to principal‑and‑interest for the remaining term.

When the switch happens:

1. Your required monthly repayment jumps because you’re now repaying the original balance over a shorter remaining term.
2. Your tax position shifts because the interest (and therefore deductible expense) usually falls over time as you pay down principal.
3. Your risk profile changes – you’re building equity faster, but with tighter cashflow.

A quick worked example

Assume:

• Investment loan: $800,000
• IO period: 5 years, then 25 years P&I
• Rate: 6.5% p.a. (variable, interest calculated monthly)
• During IO: repayments are interest only

During IO (years 1–5)

Monthly interest = $800,000 × 6.5% ÷ 12 ≈ $4,333.

After IO ends (years 6–30, P&I over 25 years)

Monthly P&I ≈ $5,406.

That’s a jump of about $1,070 per month or 25%+ – and if rates are higher or the remaining term is shorter, the jump can easily be 40–60%.

If you’ve used the property as part of a broader strategy – maybe to support your business or future upgrades – that extra $1,000+ per month has to come from somewhere. That’s why planning the switch is just as important as choosing the property in the first place.

Understanding how repayments change is the first step to a safe IO to P&I switch.

2. Why IO to P&I changes feel bigger for business owners

For employees with stable salaries, a repayment jump is mostly a household budgeting problem. For self‑employed clients and small business owners, it’s a three‑way squeeze:

• Household expenses and school fees don’t drop just because the bank wants more.
• Business cashflow may already be lumpy and seasonal.
• Lenders often assessed you with a 3% APRA buffer, but your real‑world buffers may be much thinner.

From earlier guides, we know:

• New geared property should be treated as a business‑like risk centre, and each property should stand on its own cashflow without relying on optimistic drawings from the business (/insights/small-business-owners-gearing-into-property-risks-protections).
• Borrowing safely starts with clear cashflow maps and buffers before you take on extra commitments (/insights/cashflow-buffers-risk-management-borrowing).

When an IO period ends, you’re effectively taking on a new commitment – a much higher repayment – whether or not you sign a new loan contract.

The 2026–27 tax reforms make this even sharper

Federal Budget 2026–27 will tighten how negative gearing works, especially for established properties purchased after 12 May 2026. Depending on timing and your portfolio, you may:

• Lose the ability to offset some rental losses against other income.
• Need better records to support which properties are grandfathered.
• See after‑tax cashflow worsen even if pre‑tax numbers look the same.

The upshot: you can’t assume tax refunds will keep bailing out a cashflow‑tight strategy. Any IO to P&I switch should be tested on both pre‑tax and after‑tax numbers, as we do in /insights/worked-examples-after-tax-cashflow-investment-loans-before-after-reforms.