Compare interest-only and principal-and-interest investment home loans, including cash flow, costs, risks and repayment changes.
What is the difference?
With a principal-and-interest investment home loan, each regular repayment covers interest and reduces the amount borrowed. With an interest-only structure, required repayments usually cover interest for an agreed period and do not pay down the principal.
Interest-only payments can free up short-term cash flow, but this is not the same as reducing the cost of borrowing. The principal still needs to be repaid.
Why investors consider interest-only loans
Some investors value cash flow while building a buffer for vacancies, maintenance or other expenses. In certain circumstances there may be tax considerations, but these require advice from an appropriately qualified tax professional.
Interest-only rates can be higher, and not every borrower will qualify. Lender policies and maximum interest-only periods vary.
Plan for the repayment increase
At the end of an interest-only period, the loan may transition to principal-and-interest over the remaining term. This can result in a sizeable increase in required repayments even if the interest rate has not changed.
Stress-test both the initial and later repayments. Also consider what happens if rental income falls or the property needs an unexpected repair.
Compare total interest paid
An interest-only structure normally delays principal reduction, potentially increasing the total interest paid over the loan term. The most appropriate loan depends on the broader investment strategy, risk tolerance and cash reserves.
A side-by-side illustration of the repayment schedule, remaining balance and total interest can make the trade-off easier to understand.
Questions to ask before choosing
Ask about rates, loan fees, repayment flexibility, redraw or offset access, interest-only expiry dates and the effect of making extra payments. A specialist investment property loan broker can compare options, but a loan should only proceed if its repayment obligations remain manageable.
Useful resources
For general consumer guidance, see ASIC Moneysmart. For tailored home loan assistance, speak with Fulton Financial.
General information only. Loan suitability, features, fees and eligibility depend on your circumstances and lender requirements. Consider obtaining independent legal, tax or financial advice where appropriate.
