When you take out a loan to buy an investment property, one of the first structural decisions you'll make is how you repay it. The choice between interest only and principal & interest (P&I) affects your cash flow, your tax position and your ability to grow your portfolio over time. It's worth understanding both before you decide.
The two main loan structures
Most investment loans in Australia fall into two repayment types.
Interest-only
You pay only the interest on the loan for a set period – usually five years. The loan balance does not reduce during that time. At the end of the interest-only period, the loan typically switches to P&I repayments. According to Cotality, interest-only loans comprised 19.7% of all new mortgage originations in the March quarter of 2025.
Principal & interest
With a P&I loan, every repayment reduces the loan balance. Your repayment covers both the interest charged and a portion of the loan principal. Over time, your debt reduces and your equity grows.
The benefits of interest-only loans for investors
The most immediate benefit of interest-only loans is lower monthly repayments. Let’s look at some numbers:
Assume you have a mortgage for an investment property of $900,000. At the current average rate for a new investor P&I loans at an interest rate of 5.9% (based on the Reserve Bank of Australia’s data for January 2026, see below), monthly repayments on a 30-year term would be around $5,160. On an interest-only loan, with an average interest rate of 5.77% for new investor loans, repayments would be approximately $4,328. That amounts to a saving of around $830 every month for the interest-only period.
For an investor managing multiple financial commitments, that monthly saving can meaningfully improve cash flow. It also makes it easier to hold a negatively geared property through a growth cycle without cash flow pressure becoming unsustainable.
There are also some tax benefits for interest-only loans. Interest on an investment loan is generally tax-deductible in Australia. With an interest-only loan, the interest bill stays consistent throughout the interest-only period, so the deduction stays consistent too – a predictability that has value for investors on high marginal tax rates.
Lower repayments free up capital that can be directed elsewhere, such as toward an offset account on your home loan, a deposit on a second investment property or simply to reduce non-deductible debt faster.
The drawbacks of interest-only loans for investors
While you're on an interest-only loan, you're not building equity through repayments. Your equity grows only if the property's value increases. In a flat or falling market, that can leave an investor with little equity to draw on for the next purchase.
When the interest-only period ends, the loan reverts to P&I. Because you haven't reduced the principal, repayments can increase significantly. You're now repaying the full original loan over a shorter remaining term. Planning for this transition from day one is essential.
Interest-only loans for investors also typically attract a higher interest rate than P&I loans. The gap varies, but as the latest RBA lender interest rates show, it can be around 20 basis points. That premium partially offsets the cash flow advantage, and it's worth factoring into your calculations before assuming interest-only is the cheaper option.
Lenders may also apply tighter serviceability criteria to interest-only loans, meaning your borrowing capacity could be lower than on a P&I structure.
The benefits of principal & interest loans for investors
Every P&I repayment builds equity. You're steadily reducing your debt and strengthening your balance sheet. This matters for investors planning to access equity to fund future purchases.
P&I loans also typically attract lower interest rates. That rate advantage compounds over time and can make a meaningful difference to the total cost of the loan across a 25 or 30-year term.
P&I also removes the cliff that interest-only borrowers face at the end of their interest-only period. Repayments are higher from the outset, but they're consistent and predictable, so there's no structural reset to plan around.
The drawbacks of principal & interest loans for investors
The main drawback is higher monthly repayments. For an investor whose cash flow is already committed across other expenses, the additional repayment burden of P&I on an investment loan can create pressure, particularly in the early years of ownership when the interest component is at its highest.
Higher repayments also reduce the capital available for other uses. For those looking to build a portfolio quickly, that constraint can slow the pace of growth.
For negatively geared investors, P&I repayments don't affect the tax deduction calculation directly as only the interest component is deductible, not the principal repayment. In the early years of a P&I loan, the interest component remains high, so the deduction stays meaningful. Over time, as the principal reduces, the interest component and the associated deduction gradually decline.
Choosing the right structure for you
Interest-only and P&I aren't competing products where one is clearly better. They suit different financial positions, different investment strategies and different stages of a portfolio's life.
In practice, many experienced investors use both structures at different stages. For example, in a newer portfolio still growing, interest-only loans may help maximise borrowing capacity and cash flow. If your portfolio is in its consolidation phase, P&I repayments may help reduce debt and strengthen equity.
Your choice should always reflect your broader investment strategy and factor in:
- Your income and borrowing capacity
- Your tax position
- Whether you plan to buy additional properties
- Your long-term debt reduction strategy
- Risk tolerance and cash flow flexibility
This is where a brokerage like AXTON Finance adds genuine value. The right loan structure requires someone who understands your full financial picture – your income, your existing commitments, your investment timeline and your goals – and can model how different structures perform against each other over time.
At AXTON Finance, we work with Melbourne investors at every stage of the portfolio journey, from structuring a first investment loan correctly to reviewing and refinancing an existing portfolio. Getting the structure right from the outset can save significant money over the life of a loan and preserve the borrowing capacity you need to keep growing.
If you'd like to understand which structure suits your position, AXTON Finance can work through the numbers with you. Call 03 9939 7576, email getabetterrate@axtonfinance.com.au or get in touch today.