Interest-only means you pay only the interest, not the principal, for a set period. Why investors use it and what happens when it ends.
An interest-only loan is one where the borrower pays only the interest for an agreed period, making no reduction to the principal during that time.
Lower payments during the interest-only period improve cashflow, which can be the difference between a property being holdable and not. The freed-up cash can service other debt, fund renovations, or build a deposit.
Because only interest is deductible against rental income, some investors also prefer not to pay down deductible debt while non-deductible personal debt exists.
The loan reverts to principal and interest over the remaining term, which means larger repayments than if it had been P\&I from the start. A 30-year loan with 5 years interest-only repays the principal over 25 years, not 30.
Interest-only periods are typically granted in blocks of 1–5 years and must be renegotiated. There is no guarantee of renewal — banks reassess, and lending policy may have changed.
You're not building equity through repayment. Any equity growth is coming entirely from capital growth. If the market is flat, five years of interest-only leaves you exactly where you started, having paid a lot of interest.
Renewal risk is real. Investors who assumed perpetual interest-only have been caught when a bank declined to extend and repayments jumped.
Last reviewed: 1 August 2026 · General information only, not financial advice.
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