Principal & Interest vs Interest-Only — Pros, Cons & Repayment Impact

Choosing principal & interest (P&I) or interest-only (IO) affects your monthly repayment, total interest, and how quickly you reduce your debt.

Calculate now: Use the Home Loan Repayment Calculator to compare repayments under different loan types.

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Key difference

• P&I: each repayment covers the interest charged for that period plus a portion that reduces your loan balance (principal). Over time, more of each payment goes toward principal.
• IO: you pay interest only for a set period (often 1–5 years). The principal typically doesn't decrease during the IO period.

Learn more: Interest-only home loans

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Comparison table (P&I vs IO)

Feature	P&I	IO
Short-term repayments	Higher	Lower
Loan balance	Reduces each payment	Stays the same
Total interest	Lower	Higher
Equity growth	Faster	Slower
Rate rise risk	Lower	Higher
Best for	Owner-occupiers	Investors (cashflow)

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What happens when the interest-only period ends?

This is the biggest "gotcha".

When IO ends:

• you start paying principal
• you have less time remaining to repay the same amount
• repayments often jump noticeably

Example:

• 30-year term with 5-year IO → you may have 25 years left to repay the full principal.

If rates are higher at that time, the jump can be bigger.

To understand repayment schedules and why repayments change, see:

• Amortisation schedule explained

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Scenarios: which option fits?

Scenario 1: Owner-occupier buying a home to live in

Most owner-occupiers prefer P&I because it:

• steadily reduces debt
• builds equity through repayments
• is easier for long-term budgeting

If you want to accelerate payoff on P&I:

• Extra repayments guide

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Scenario 2: Investor prioritising short-term cashflow

Some investors use interest-only to keep repayments lower, particularly early on.

But you should plan for:

• higher total interest
• repayment increase when IO ends
• slower principal reduction

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Scenario 3: Borrowers with uncertain income in future

If your income might reduce (e.g., parental leave), IO can look attractive — but the "later" repayments may become a problem.

A safer approach can be:

• choose P&I
• keep a cash buffer in offset
• avoid future repayment shocks

See: Offset account explained

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How to compare your numbers (fast method)

1. Open the repayment calculator
2. Enter your balance, rate, and term
3. Compare:
   • P&I repayments
   • IO repayments (for your intended IO period)
4. Consider what repayments could be after IO ends

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FAQs

Is interest-only cheaper?

It's cheaper in the short term (lower repayments), but often costs more overall due to higher total interest.

Does interest-only build equity?

Not from repayments. Equity can still increase through property value growth, but the loan balance usually doesn't reduce during IO.

What's the biggest risk of interest-only?

The repayment jump after the IO period ends — especially if rates rise or your income changes.

Can you switch from IO to P&I?

Often yes, but it depends on lender policies and your serviceability at the time.

Is P&I always the best choice?

Not always, but it's the most common choice for owner-occupiers wanting long-term stability and faster debt reduction.

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Related guides

• Home Loan Repayment Calculator
• Interest-only home loans
• Amortisation schedule explained
• Extra repayments guide

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Important: This guide is general information only. Check lender terms and model repayments after the IO period ends before choosing interest-only.