Interest-Only Mortgage Calculator
What is the difference between interest-only and principal and interest repayments?
Interest-only loans have lower short-term repayments but higher long-term costs. Understanding the trade-off is important before you choose. Use this calculator to compare both options side by side.
How does it work?
An interest-only (IO) home loan means you only pay the interest charged on your loan balance during the IO period, typically 1 to 5 years. Your loan balance does not reduce during this time. After the IO period ends, the loan switches to principal and interest (P&I) repayments where you pay both the interest and start paying down the balance. Because you have the same loan balance to repay but fewer years remaining to do it, P&I repayments after an IO period are typically higher than if you had started P&I from the beginning. This calculator shows you both scenarios.
The calculator has been provided in good faith as a guidance tool only. Results are not financial advice, are a guide only, and are not a guaranteed outcome or quote. Borrowers should always discuss their individual situation with an Australian Credit Licensee or authorised Credit Representative.
What you need to understand about interest-only loans?
The IO period
Most lenders offer IO periods of 1 to 5 years for owner-occupiers and up to 10 years for investors in some cases. When the IO period ends, repayments increase as you now need to repay the full loan balance in the remaining term.
The rate difference
Interest-only loans often have a slightly higher interest rate than equivalent P&I loans. The lower repayments during the IO period can be offset by a higher rate.
When does an interest-only loan make sense?
• IO loans are most commonly used by property investors who want to keep cash flow flexible while the property grows in value.
• For owner-occupiers, IO loans are less common and should be used carefully because you are not building equity during the IO period.
• Always have a plan for when the IO period ends. Your repayments will increase. Make sure your budget can handle the switch to P&I.
• Do not choose an IO loan purely for lower short-term repayments without understanding the long-term cost difference.
Interest-only repayment questions we get asked a lot:
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Yes, but lenders scrutinise the reason carefully and IO periods for owner-occupiers are typically shorter than for investors. Lenders need to be satisfied it is in your best interests, which means the bar is higher.
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Your loan automatically switches to principal and interest repayments. Because you now have fewer years to repay the same balance, your repayments increase, sometimes significantly. This is called the IO cliff and it can catch people by surprise if they have not planned for it.
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Generally yes. You pay more total interest over the life of the loan because the balance does not reduce during the IO period. The calculation in this calculator will show you the total interest difference.
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Yes. Most lenders allow you to switch to P&I before the IO period expires. Some charge a fee for this. Ask your lender or ask us.
Not sure whether IO or P&I suits your situation?
It depends on whether you are buying to live in or invest, your cash flow, and your long-term plan. Let us work it out together.