Principal and interest vs interest-only
Principal and interest repayments pay down the amount you borrowed as well as the interest, so each repayment is higher and the loan gets cheaper over time. Interest-only repayments cover only the interest for a set period, so each repayment is lower, the balance does not move, and the rate is usually higher. This guide works both on a $500,000 loan, lists the interest-only periods lenders publish, and covers the tax reason investors choose one and owner-occupiers should not.
- On $500,000 at 6% over 30 years: P&I is about $2,998 a month; interest-only is $2,500 a month for the period, then about $3,222 over the remaining 25 years
- Five years interest-only adds roughly $37,000 of interest over the loan; St.George publishes $37,170 on its own $500,000 example
- Interest-only usually carries a higher rate: St.George and AMP both publish that P&I rates are generally lower
- Published interest-only periods: up to five years (AMP), 5 to 10 years (St.George), five years in NAB’s example; investors get longer than owner-occupiers
- Investors choose interest-only for deductibility and cash flow; for an owner-occupier the interest is not deductible and the balance does not fall
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees, or other loan amounts might result in a different comparison rate. Comparison rates are based on a secured loan of $30,000 over 5 years for vehicle finance and $50,000 over 5 years for equipment finance, as required under the National Credit Code.
What is the difference?
St.George puts it in one sentence: with principal and interest, your repayments go toward both the principal, the amount you borrowed, and the interest charged; with interest-only, repayments only count towards the interest. NAB adds the consequence: interest-only repayments are usually lower initially, cover only the interest for a set period, and at the end of that period the loan typically switches to principal and interest, with the remaining balance repaid over the rest of the term. Every other difference, the rate, the total cost and the jump at the end, follows from that.
Worked example: $500,000 at 6% over 30 years
| Repayment type | Monthly repayment | Balance after 5 years | Repayment from year 6 | Total interest over 30 years |
|---|---|---|---|---|
| Principal and interest from day one | About $2,998 | About $465,000 | About $2,998 | About $579,000 |
| Interest-only for 5 years, then P&I over 25 | $2,500 | $500,000 | About $3,222 | About $617,000 |
The interest-only borrower pays $498 a month less for five years, $29,900 in total, then $224 a month more for 25 years, and ends up paying about $37,000 more interest overall. St.George's published example on the same loan size reaches $37,170. That assumes the same rate for both, which flatters interest-only: St.George and AMP both publish that principal and interest loans generally carry lower rates, so the real gap is wider. Run your own numbers in the repayment calculator.
What do lenders publish about interest-only periods?
Checked against each lender's published page on 20 September 2026; "Not published" means the page does not state it. Policies change without notice, so confirm before relying on them.
| Lender | Interest-only period | Rate | What happens after | Other published points |
|---|---|---|---|---|
| NAB | Five years in its worked example on a 30-year loan | Higher interest rate during the interest-only period | Remaining balance repaid over the remaining 25 years; a noticeable increase in repayments | Interest-only generally costs more over the life of the loan |
| St.George | A set period, 5 to 10 years for example | P&I rates usually lower than interest-only | Switches to principal and interest | $500,000 example: P&I over 30 years costs $37,170 less interest; interest on a rental property loan may be deductible, see a tax adviser |
| AMP | Usually up to five years | P&I generally has lower rates | Reverts to principal and interest | P&I repayments higher initially because part goes to principal |
| BOQ | Not published on the page | Publishes separate rates by repayment type | Not published | — |
| Moneysmart | Calculator lets you model any period | — | Shows the repayment jump | Government calculator, no product |
Who should choose interest-only?
Investors, for a defined period, when the plan depends on it. The interest on a loan used to buy a rental property is generally deductible, and St.George publishes that all repayments on an interest-only investment loan could potentially be claimed, with the standard advice to confirm with a tax adviser. Lower repayments free up cash flow for the next deposit, and keeping the investment balance high while paying down the non-deductible home loan is the classic structure. The cost is the higher rate and the larger total interest, which the deduction offsets only in part.
Owner-occupiers, rarely. The interest is not deductible, the rate is higher, and after five years you owe exactly what you borrowed. The cases that make sense are temporary: a construction loan while the house is built, a bridging period between properties, or a short period of reduced income where the alternative is hardship. In each, the plan should include the date it switches back.
Planning for the switch
The repayment rises twice at the end of an interest-only period: because principal is now included, and because the remaining term is shorter. On the $500,000 example that is $2,500 to $3,222, a 29% jump. Lenders reassess an extension as a new application, and APRA's serviceability buffer applies. A year out, decide whether you will absorb the increase, apply to extend, or refinance to a fresh 30-year term at a lower P&I rate. A broker will run all three, and Your Finance Guide refers you to one licensed broker partner for that; we do not lend or assess applications ourselves.
Repayment guides
The calculators and the features around the repayment decision.
P&I vs interest-only FAQs
What are the disadvantages of an interest-only mortgage?
Is it a good idea to pay interest only?
Can you pay off principal on an interest-only loan?
How long can I have interest-only repayments?
What happens when the interest-only period ends?
Which repayment type gets the lower rate?
Get the repayment type right for your plan
Tell us whether the property is a home or an investment and how long you plan to hold it, and we refer you to one licensed broker partner who compares P&I and interest-only on total and after-tax cost across lenders. Free for borrowers, no obligation.