Interest-Only vs Principal and Interest Investment Loans After the 4.60% Hike: Which Wins in 2026?

Published 10 October 2026 · Prepared by the Property Investment Professionals research desk · Rates and law checked 9 October 2026

On Friday 9 October the big four banks' variable home-loan rates rose by 0.25 percentage points, passing on the Reserve Bank's 29 September increase to a 4.60% cash rate, the highest since 2011. On a $750,000 interest-only investment loan, the four rises of 2026 now cost $625 a month more than in January; on the same loan on principal-and-interest terms over 30 years, our calculation is about $488 a month, because part of each repayment is principal and does not move with the rate.

Yet interest-only lending is growing. APRA's June-quarter data put it at 23.5% of new housing lending, up from 20.5% at the end of 2024, and the RBA's October Financial Stability Review says that rise "by itself … is not cause for concern". Investors are choosing interest-only in a rising-rate, falling-price market, and the reasons are the ones this guide works through: cash flow, deductible interest and liquidity, set against a rate loading, slower equity and a repayment jump when the term ends.

This guide answers the question for anyone writing a new investment loan, or facing an interest-only expiry, in late 2026, at post-hike rates, under the enacted negative gearing rules and APRA's current settings, in a market 5.2% below its peak. General information only; speak to a licensed mortgage broker and a registered tax agent before you act.

Interest-only vs principal and interest: the comparison

Source: our calculations at 6.75% on a 30-year term; rates from RBA Table F6 (XLSX) (August 2026, published 8 October 2026; by-repayment-type series cover fixed and variable loans). Illustrative only; lender pricing and policy vary.

Principal and interest wins eight of twelve rows, and the four it loses are the four that matter to an investor who is still building: cash flow, deductible interest, offset strategy and flexibility.

Key takeaways

• The investor interest-only loading is 0.19 points on RBA averages and 0.25 to 0.50 points on the Westpac products we reviewed; the owner-occupier loading is far larger, which is why interest-only on a home loan rarely makes sense.
• Interest-only is assessed on the harder number: the principal-and-interest repayment over the shorter residual term, plus 3 percentage points.
• The reversion jump is 23% to 35%, and in a market where values are falling the extension you planned on may be declined. Decide 12 months before expiry.

How do interest-only and principal-and-interest repayments work?

The first month on $600,000

At 6.75%, the first month's interest on $600,000 is $3,375 either way. The interest-only borrower pays that and the balance stays at $600,000. The principal-and-interest borrower pays $3,892, the same interest plus $517 of principal, and the balance ticks down. Next month the principal-and-interest borrower is charged slightly less interest and pays slightly more principal; the interest-only borrower is charged exactly the same again.

What the balance does

After five years the principal-and-interest balance is about $563,250, so the borrower has repaid $36,750 of principal regardless of what the property did; the interest-only balance is still $600,000. Everything else in this guide follows from that difference.

Three mechanics to get right

• Interest-only is a feature, not a product. It is an option on a variable or fixed loan, usually capped at five years. The 30-year term does not change.
• Offset works on interest-only. It cuts the interest charged without touching the contracted balance, which is the engine of most debt-recycling structures.
• Principal and interest can still be flexible. Extra repayments and redraw give some of interest-only's flexibility while the balance falls. Our fixed vs variable guide covers the rate-type choice.

What does a 4.60% cash rate do to the comparison?

The worked tables

Source: our calculation. Assumes a constant 6.75% rate, monthly compounding, no offset, extra repayments or refinancing. Illustrative only.

Source: our calculation; same assumptions as above.

Source: our calculation at a constant 6.75% on a 30-year term, monthly compounding, no offset, extra repayments or refinancing. Illustrative only.

Two things to read off these tables: the monthly gap is real money for an investor holding two or three loans, and the reversion line does not fall back to the principal-and-interest figure but rises above it, because the full balance is now repaid over 25 years instead of 30.

What the 2026 rate rises added

The cash rate has risen four times this year: to 3.85% in February, 4.10% in March, 4.35% in May and 4.60% from 30 September. On interest-only debt, each 0.25 point rise adds $20.83 a month per $100,000 borrowed.

Source: our calculation. Interest-only: loan × rate change ÷ 12. Principal and interest: the 30-year repayment at 6.75% less the repayment at 5.75% (6.50% for this rise). For comparison, Canstar's 29 September estimate for owner-occupier loans over 25 years was $454 a month on $750,000 for the four rises; the basis differs, so the two sets are separate illustrations. Big-four increases effective 9 October 2026; Macquarie 15 October.

Source: our calculation. Interest-only: loan × 1.00pp ÷ 12. Principal and interest: the 30-year repayment at 6.75% less the repayment at 5.75%. Illustrative only.

Interest-only borrowers feel rate rises in full, because every dollar of the repayment is interest; principal-and-interest borrowers feel a smaller dollar increase because part of their repayment is principal.

Lifetime interest

Over a 30-year life, a $600,000 loan run interest-only for five years costs about $45,000 more interest than the same loan run principal and interest from the start, because the balance stays at $600,000 for five years and the deferred principal then accrues interest for 25 more. Stretch interest-only to ten years and the extra is about $99,000. On $800,000, the figures are about $60,000 and $132,000.

How much more does interest-only cost in rate and borrowing power?

The loading, measured two ways

The RBA's F6 table, published on 8 October with August data, gives the system averages by repayment type across fixed and variable loans. New investor loans were written at 6.51% interest-only against 6.32% principal and interest, a 0.19 point loading. New owner-occupier loans were written at 7.04% interest-only against 6.15% principal and interest, a 0.89 point loading.

Advertised rates depend on the pricing offer. On 9 October Westpac's Flexi First Option Investment Property Loan at up to 70% LVR showed a "discounted rate" of 6.99% principal and interest and 7.49% interest-only, a 0.50 point loading, and an "online offer" (new lending only, excluding internal refinances) of 6.39% and 6.64%, a 0.25 point loading; its packaged Rocket Investment Loan ran 6.84% against 7.10%. Those are advertised rates for the products we reviewed, not negotiated rates or a market-wide range, and they move; check them on the day.

Source: RBA Table F6, Housing Lending Rates (XLSX) (August 2026 data, published 8 October 2026; by-repayment-type series cover fixed and variable loans); Westpac home loan interest rates as displayed 9 October 2026, discounted-rate and online-offer variants; loading cost is our calculation (loan × loading ÷ 12).

Source: RBA Table F6, Housing Lending Rates (August 2026 data, published 8 October 2026); Westpac home loan interest rates as displayed 9 October 2026. Loading = interest-only rate less principal-and-interest rate; values in the table above.

At a 0.2 point loading, the interest-only repayment on $600,000 is $3,375 against a principal-and-interest repayment of $3,812 at 6.55%, so the monthly gap narrows from $517 to about $437. At a 0.5 point loading (principal and interest at 6.25%, about $3,694) it narrows to about $319. Model your actual interest-only rate, not the principal-and-interest rate, or the structure flatters itself.

A second rate test sits behind the repayment tables. At 80% LVR and 6.75%, gross rent covers the interest bill alone only at a gross yield of about 5.4% (80% × 6.75%). Cotality's September gross yields were 3.85% nationally, 3.4% in Sydney, 4.1% in Melbourne, 3.5% in Brisbane and 6.5% in Darwin, so on our analysis a typical capital-city investment loan at 80% LVR does not cover its interest from rent, before rates, insurance, management and vacancy. Interest-only lowers the repayment; it does not close that gap, and the structure decision sits on top of it.

The buffer and the residual term

APRA expects authorised deposit-taking institutions (banks, credit unions and building societies) to assess new borrowers with a serviceability buffer of at least 3 percentage points above the loan rate, a setting it held at its July 2025 review. At 6.75% that is an assessment rate of about 9.75%. For interest-only applicants, APRA's guidance (APG 223) expects the assessment to use the principal-and-interest repayment over the term remaining after the interest-only period. On $600,000, that is $5,347 a month over 25 years rather than $5,155 over 30, so the interest-only borrower is assessed on a higher repayment even though the actual interest-only repayment is lower. Each lender applies its own full policy on top, and lenders can approve a limited number of exceptions (5.8% of new lending in the June quarter on APRA's data), so these are supervisory expectations, not a single rule.

That is why interest-only can reduce your borrowing capacity; our borrowing capacity guide and calculator let you test both structures.

The debt-to-income limit

Since February 2026 APRA has limited lending at a debt-to-income ratio of six or more to 20% of a lender's new loans, measured quarterly and applied separately to owner-occupier and investor books. In the June quarter, high-DTI loans were 8.9% of new investor lending and 3.7% of owner-occupier lending (APRA, 17 September 2026), so the limit binds only at the margin, for investors carrying several loans, who are also the borrowers most likely to want interest-only. Our APRA DTI guide explains the mechanics.

LVR and deposit

Many lenders cap interest-only loans at a lower maximum LVR, or price them more steeply above 80% LVR, because the lender relies on your deposit rather than your repayments for its equity buffer; the caps are lender- and product-specific, so check the policy for the product you want. Westpac's tiering above shows the price effect: the interest-only loading is the same 0.50 points at every tier on its discounted rate, but the base rate steps up 0.40 points between 70% and 80%-plus LVR. If interest-only pushes you to a bigger deposit, that is a capital decision as much as a rate one. Our deposit guide sizes it.

Is interest-only still tax-effective under the enacted negative gearing reform?

Why interest is deductible and principal is not

The ATO allows a deduction for interest on borrowings used to acquire an income-producing asset. The principal portion of a principal-and-interest repayment is repayment of borrowed money, not a cost of earning income, so it is not deductible. For a pure investment loan, principal and interest gives no tax advantage over interest-only: both deduct the same interest on the same balance. What interest-only does is keep the balance, and therefore the deductible interest, high for longer while preserving cash. That is a cash-flow strategy, not an extra deduction.

Deductibility follows the purpose of the borrowing, not the security or the repayment type: borrowing against your home to fund an investment is generally deductible; borrowing against an investment property for private spending is not. Keep investment and private borrowings in separate loans.

What the enacted reform changes

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 passed both houses on 25 June 2026 and received Royal Assent on 26 June. Its property measures commence on 1 July 2027. The test is what you contracted to buy and when:

Source: Treasury Laws Amendment (Tax Reform No. 1) Act 2026; see our complete negative gearing guide for the method statement and worked examples. The 2026-27 year runs under the old rules for everyone.

For a grandfathered investor, nothing about the interest-only tax logic changes. For a post-cut-off buyer of an established dwelling, a quarantined loss keeps its full value inside the property calculation (and can absorb taxable rental profit on another dwelling) but no longer reduces this year's tax on wages: the annual cash-flow subsidy becomes a deferred tax asset. That matters for interest-only specifically, because the structure's appeal rests on a large annual deduction that, from 1 July 2027, is still real but no longer liquid for those buyers. Our grandfathering transition plan covers the timing.

The same Act replaces the 50% CGT discount for individuals and trusts from 1 July 2027 with CPI indexation and a 30% minimum tax, with a deemed disposal just before that date preserving the discount on gains to 30 June 2027. That affects the hold-or-sell decision rather than the repayment structure, and it is the question our Sell or Hold Planner is built for.

What happens when interest-only ends in a falling market?

The arithmetic

Source: our calculation, constant rate, monthly compounding. Illustrative only.

Source: our calculation, constant rate, monthly compounding; the 7.00% bar is a stress assumption, not a forecast. Values in the table above.

The jump has two causes that land together: the principal is untouched, and the term left to repay it has shrunk by the length of the interest-only period. A rate rise at the same time compounds it. Westpac and ANZ expect a fifth 2026 rise to 4.85% on 3 November; CBA and NAB expect a hold (Aussie, 6 October). The 7.00% row is a stress assumption, not a forecast; anyone reverting over the next year should test it alongside the 6.75% one.

Falling values and the extension test

An extension is a new credit decision. The lender re-assesses income, expenses and all debts at the buffer, against a current valuation. Three things have changed for a borrower whose interest-only term was written in 2021 or 2022: the assessment rate is about 9.75% rather than the roughly 5% to 6% that applied at loan rates of 2% to 3% with the buffer then in force, the DTI limit exists, and the valuation may be lower than the purchase price.

The RBA's October Financial Stability Review puts the equity picture in perspective: fewer than 1% of borrowers are in negative equity after the fall so far, and a further uniform 20% fall would take that to only about 5%, but "recent buyers and those who took out higher LVR loans are more likely to be in negative equity". If you bought in 2024 or 2025 at 80% to 90% LVR in a capital where values are 5% to 9% below their peaks, your LVR on a fresh valuation may now sit above the lender's interest-only ceiling; our analysis of the Review sets out the household numbers. The Review also says the rise in interest-only lending "by itself … is not cause for concern", which describes the system, not your extension.

The 2018 precedent

Australia has run this experiment before. The RBA's May 2018 Statement on Monetary Policy estimated that about $120 billion of interest-only loans a year would convert to principal and interest over 2018 to 2021, with a repayment step-up of "around 30–40 per cent". Many borrowers switched early, others extended or refinanced, and the Bank judged the aggregate cash-flow effect "relatively modest". The difference in 2026 is that rates are rising into the reversion and values are falling, so the individual borrower's margin for error is thinner.

Your four options, and when to decide

Source: our analysis. Each option needs your own numbers; the Sell or Hold Planner models the last two.

When does interest-only suit investors, and when does P&I win?

The decision matrix

Source: our analysis. A decision aid, not advice.

The non-deductible debt rule

If you still owe money on your own home, the structure that beats both pure options is principal and interest, or an offset-heavy loan, on the home and interest-only on the investment, with every spare dollar directed at the non-deductible debt. The home loan's interest gives you no deduction, so paying it down earns the full rate after tax; the investment loan's interest is deductible, so keeping that balance high while you clear the home loan is the efficient order. That is debt recycling in one sentence. It only works with separate loans, discipline and tax advice, and our equity guide covers how investors then recycle the freed equity.

De-risking in a falling market

Every principal-and-interest repayment reduces your loan balance regardless of prices. It does not guarantee a lower LVR, because the value side of the ratio can fall faster than the balance, but in a market that has fallen 5.2% nationally and may fall 9% to 15% peak to trough on the main forecasts, debt you have repaid is the one part of your equity you control. For an investor who has finished accumulating, or who cannot be sure of deploying the saving, principal and interest is the lower-risk default and, in our analysis, the right answer more often than the cheap-money years made it look.

What November changes

Whether or not the 3 November meeting delivers the rise to 4.85% that Westpac and ANZ expected as at 6 October, the decision does not change which structure suits you; it changes the margin you need. Model both structures at 7.00% as well as 6.75% as a stress test, not a prediction. If interest-only only works at the lower rate, it does not work.

What would change our view: the F6 investor loading widening past 0.5 points, lenders cutting interest-only LVR ceilings, or national values falling past the 9% to 13% forecast cluster would push the default further toward principal and interest. A sustained narrowing of the loading below 0.2 points alongside rate cuts would strengthen the interest-only case for borrowers who deploy the saving. We will revisit this guide after the November meeting and the next F6 release.

Which structure suits which investor? Five profiles

Profile 1: The portfolio builder

Situation: Aisha owns two investment properties, both grandfathered, and is buying a third with a $650,000 loan at 80% LVR. Her home is paid off. Serviceability across three loans is her constraint.

Reasoning: interest-only frees about $560 a month on the new loan, protects capacity across the portfolio and keeps deductible interest high on a grandfathered structure. She accepts a 0.2 to 0.5 point loading and a reversion in five years.

Strategy: interest-only with a linked offset; the freed cash goes to the offset and the next deposit; expiry diarised; post-reversion figure modelled at 7.00% before signing.

Profile 2: The consolidator

Situation: Tom, 54, holds one investment property and $180,000 on his home. He has finished buying and wants low debt by 60.

Reasoning: past accumulation, equity and risk reduction dominate. He has no better use for the interest-only saving than clearing debt, and no appetite for a 23% repayment jump in his late fifties.

Strategy: principal and interest on both loans; the home loan first, then extra repayments on the investment loan.

Profile 3: The debt recycler

Situation: Mia and Sam carry a $720,000 home loan and a $480,000 investment loan.

Reasoning: the home loan's interest is not deductible; the investment loan's is. Keeping the investment balance high while every spare dollar reduces the home loan is the efficient order.

Strategy: interest-only on the investment loan; principal and interest plus offset on the home; surplus and the interest-only saving directed at the home loan; loans kept separate; annual tax review.

Profile 4: Interest-only expiring in 2027, Sydney

Situation: Priya bought a Sydney unit in 2022 at 85% LVR on a five-year interest-only term that ends in mid-2027. Sydney values are 8.6% below their February peak.

Reasoning: the city-wide fall since February says nothing precise about her unit, which she bought before the peak; what decides the extension is her current balance against a current valuation and the lender's interest-only LVR policy. If a valuation puts her above the lender's ceiling, an extension will not pass. Either way the repayment steps from about $3,656 to $4,490 a month on $650,000 at 6.75% over the residual 25 years.

Strategy: decide now, not in 2027. Get an indicative valuation and the lender's interest-only LVR policy, build the offset through the next twelve months, test the post-reversion figure at 7.00%, and if it does not fit, run the hold-versus-sell numbers with a tax agent; the deemed disposal preserves the 50% discount on gains to 30 June 2027 whether she sells before or after that date.

Profile 5: Buying an established dwelling after the cut-off

Situation: Daniel is buying an established house in Adelaide in late 2026, so his net rental losses will be quarantined from 1 July 2027.

Reasoning: interest-only still preserves cash flow and the deduction still exists inside the property calculation, but from July 2027 it will not reduce his tax on salary each year. The cash-flow value of a big interest bill is lower than for a grandfathered buyer.

Strategy: model both structures with the loss quarantined, not offset; principal and interest unless the freed cash has a clearly better use; revisit if he later holds a second, positively geared dwelling the loss can absorb.

What should you do next?

Mistakes to avoid

• Choosing interest-only for the lower repayment alone. Without a use for the difference you pay about $45,000 more interest on $600,000 and build no equity.
• Modelling interest-only at the principal-and-interest rate. Add the loading: 0.19 points on RBA averages, 0.25 to 0.50 points on the advertised products we reviewed.
• Treating interest-only as a deduction. Interest is deductible either way; principal never is, and a post-cut-off established purchase has its loss quarantined from 1 July 2027.
• Running interest-only on your home loan. The owner-occupier loading is 0.89 points on RBA averages and there is no deduction to protect.

Checklist

• Decide whether you are building or consolidating; the structure follows.
• Get the three numbers from your broker: actual interest-only rate with loading, assessed repayment over the residual term at the buffer, maximum LVR.
• Model both structures at 6.75% and 7.00% with the cash-flow calculator and test capacity with the borrowing capacity calculator.
• Classify every property as grandfathered, post-cut-off established, or eligible new dwelling, and model quarantined losses where they apply.
• If an interest-only term ends within 18 months, get the post-reversion figure in writing and an indicative valuation now.
• Put non-deductible debt on principal and interest or a heavy offset before optimising the investment loan.
• If the hold case has weakened, run the numbers in the Sell or Hold Planner before 30 June 2027.
• Get tax advice on loan separation and deductibility, and credit advice on the structure, then pre-approval.

The Bottom Line

Neither structure wins outright, and at a 4.60% cash rate the choice carries more weight than it did in the cheap-money years. Interest-only keeps about $517 a month in your pocket on a $600,000 loan, preserves deductible interest and gives you liquidity in a falling market, which is why its share of new lending is rising. It also costs a loading, is assessed on the harder number, builds no equity while values fall, and steps up 23% to 35% when the term ends, at a time when the extension you planned on may not pass.

Principal and interest costs more each month and reduces the debt whatever the market does. It is the lower-risk default, the right structure for non-deductible debt, and the answer for anyone who would spend the difference rather than deploy it. Model both structures at your actual rates and at a 7.00% stress rate, classify every property against the 12 May 2026 cut-off, plan the reversion a year out, and let the strategy set the structure.