In short: This calculator compares monthly repayments and lifetime interest on the same loan under interest-only and principal-and-interest terms. The rule of thumb: interest only cuts repayments by roughly 15 to 20% at current rates, but every year you are not paying principal adds to the total interest bill and raises the repayment when the loan switches back.
- P&I repayment from day one$3,597.30
- Interest-only repayment$3,150.00
- P&I repayment after IO ends$3,976.58
- Total interest — P&I$695,029
- Total interest — IO then P&I$781,974
Interest-only suits investors managing cash flow and tax; owner-occupiers usually pay more overall.
Extra interest paid with IO period: $86,945
That is a general estimate on standard assumptions. Every lender applies its own expense benchmarks, income shading and policy, so the real figure moves from lender to lender. Gorakh spent years as a senior credit officer deciding exactly these questions. Send him the numbers above and he will tell you what is realistic and which lenders fit — at no cost to you for home loans.
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Interest-only loans are a cash-flow tool, common for investors who want to maximise deductible interest, and occasionally useful for owner-occupiers through a tight patch. They are not a way to make a loan cheaper.
How this calculator works
Interest-only repayments
During the interest-only period, the monthly repayment is simply the loan balance multiplied by the annual rate, divided by 12. Nothing comes off the balance, so the repayment stays flat and the loan owes the same at the end of the period as at the start.
The switch to principal and interest
When the interest-only period ends, the calculator re-amortises the full balance over the remaining term. A 5-year interest-only period on a 30-year loan leaves 25 years to repay the whole amount, which is why the repayment jumps. The comparison loan uses the standard amortisation formula over the full 30 years from day one.
Assumptions
- Same interest rate on both structures. In practice lenders often charge a higher rate for interest only, especially for investors, which widens the gap.
- Rate held constant for illustration.
- No offset, extra repayments or fees.
How to use the result
Use the monthly saving to judge whether interest only solves a real short-term problem, then look at the lifetime interest difference to see what that solution costs. For investors, feed the interest figure into the investment property cashflow calculator, since interest on an investment loan is generally deductible and the after-tax cost is lower than the headline. Owner-occupiers should read the interest-only loans guide before assuming a lender will approve it; lenders assess interest-only applications on the higher principal-and-interest repayment over the shortened term, plus the 3% APRA buffer.
Worked example
Three loan sizes typical of Melbourne's north, over 30 years. For illustration, at 6.00% p.a.
| Loan amount | Principal and interest (30 years) | Interest only | Monthly saving |
|---|---|---|---|
| $500,000 | $2,998 | $2,500 | $498 |
| $600,000 | $3,597 | $3,000 | $597 |
| $700,000 | $4,197 | $3,500 | $697 |
Now the $600,000 loan with a 5-year interest-only period followed by 25 years of principal and interest:
| Structure | Years 1 to 5 | Years 6 to 30 | Total interest over 30 years |
|---|---|---|---|
| Principal and interest throughout | $3,597 | $3,597 | $695,029 |
| Interest only for 5 years, then P&I | $3,000 | $3,866 | $739,743 |
The interest-only borrower saves $597 a month for five years, about $35,800 in total, but then pays $269 a month more for 25 years and $44,714 more interest overall. If the interest-only rate were 0.30% higher, as is common, the gap grows further.
What this calculator doesn't include
- The rate premium many lenders charge for interest-only terms.
- Tax deductibility for investors, which can make interest only cheaper after tax than the raw numbers suggest.
- Maximum interest-only periods, usually 5 years for owner-occupiers and up to 10 for investors, subject to re-approval.
- The lender's serviceability test, which assesses you on the principal-and-interest repayment over the shortened term.
Tips to improve the outcome
- Put the monthly saving into an offset account rather than spending it, so you keep the flexibility while still reducing interest.
- Investors: pair interest only on the investment loan with principal and interest on the owner-occupied home, so you pay down non-deductible debt first.
- If the goal is simply lower repayments, compare a longer term or refinancing to a lower rate before choosing interest only.
- If you are under pressure, speak to your lender or read mortgage stress: what to do before switching structures; hardship arrangements may suit better.
Frequently asked questions
Is interest only cheaper than principal and interest?
Cheaper per month, dearer overall. On a $600,000 loan at 6.00%, interest only costs $3,000 a month against $3,597 for principal and interest. Because the balance never falls during the interest-only years, you pay around $44,700 more interest over 30 years and face a higher repayment when it switches. Interest only trades long-term cost for short-term cash flow.
Why do investors choose interest only?
Investment loan interest is generally tax deductible, while principal repayments are not. Keeping the investment loan interest only maximises deductions and frees cash to pay down the non-deductible home loan or build an offset. Our negative gearing guide explains how the tax side works. It also keeps rental cash flow closer to neutral.
Can owner-occupiers get an interest-only loan?
Yes, but lenders scrutinise the reason. Common accepted purposes include parental leave, a planned sale, or renovating. You are assessed on the principal-and-interest repayment over the remaining term after the interest-only period, plus the 3% assessment buffer, so it does not increase borrowing power. Periods are typically capped at five years.
What happens when my interest-only period ends?
Your loan reverts to principal and interest over the remaining term, and the repayment rises. On a $600,000 loan after five years interest only, the repayment moves from $3,000 to $3,866 a month. You can apply to extend interest only, but that is a new credit assessment, not an automatic right.
Talk to GNT Finance
Interest only is a structuring decision that should fit a plan, whether that is an investment strategy or a temporary cash-flow gap. Gorakh spent years as a senior credit officer assessing exactly these applications, and GNT Finance can tell you which lenders will approve it and at what cost, at no cost to you for our home-loan service in most cases. Book a free consultation or call 0426 403 703.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.