Interest Only vs Principal & Interest — Which Is Better for Investors?
We are not a credit assistance provider and we do not recommend loan products, structures or lenders. PremiumRea holds no Australian Credit Licence and is not authorised under one. What follows describes how the two repayment structures differ in general terms so you can have a shorter conversation with a licensed mortgage broker or your lender. It is not a recommendation, it takes no account of your circumstances, and the interest rates quoted are indicative market observations at the time of writing, not offers.
Investors commonly consider Interest Only (IO) rather than Principal & Interest (P&I) on investment debt. The trade-offs, factually:
Indicative rates observed (2026):
- Principal & Interest (P&I): 6.39%–6.59%
- Interest Only (IO): 6.49%–6.79%
What IO changes:
- Lower monthly repayments during the IO period, because no principal is repaid
- The whole repayment is interest, and interest on investment borrowings is generally deductible — the deductibility question is one for a registered tax agent, not for us
- More cash retained in the short term
- The loan balance does not reduce during the IO period, and repayments step up when the IO period ends. IO periods are time-limited and the reversion is the part most often underestimated.
Example on a $560K loan (80% of $700K):
- P&I monthly repayment: ~$3,540
- IO monthly repayment: ~$3,033
- Monthly saving: $507 ($6,084/year)
When to use P&I instead:
- Owner-occupied properties (no tax benefit from IO)
- SMSF loans (some lenders require P&I)
- When you want to build equity faster for refinancing
IO term: Typically 5 years, then reverts to P&I. You can refinance to a new IO term at that point.
LVR, Deposits & Lenders Mortgage Insurance (LMI)
Loan-to-Value Ratio (LVR) determines how much you can borrow relative to the property value:
80% LVR (Standard): 20% deposit required
- No LMI
- Best interest rates
- Most lender options
- Example: $700K property = $140K deposit
90% LVR: 10% deposit + LMI
- LMI cost: $15,000–$18,000 (can be capitalised into the loan)
- Higher interest rates
- Example: $700K property = $70K deposit + $16K LMI
Professional exceptions: Nurses, accountants, lawyers, and doctors can often access 90% LVR with NO LMI — ask your broker about professional packages.
95% LVR (VHF scheme): 5% deposit
- Only for first home buyers via Victorian Homebuyer Fund
- Government contributes 25% as shared equity
- No LMI required
- Example: $700K property = $35K deposit
The trade-off, factually: borrowing above 80% LVR generally triggers Lenders Mortgage Insurance, commonly $15K–$18K at 90% LVR on the purchase prices we see. LMI insures the lender, not you. Against that, waiting to save a larger deposit has its own cost. Which side of that trade-off is right for you is a credit question for a licensed mortgage broker — we hold no Australian Credit Licence and do not recommend an LVR. We have removed a recommendation that previously sat here, together with a rule of thumb that turned on an assumed rate of price growth.
Borrowing Capacity & Couple Strategy
PremiumRea holds no Australian Credit Licence and is not a credit assistance provider. We do not assess borrowing capacity, recommend lenders or loan products, or structure borrowings. Only a licensed mortgage broker or the lender itself can tell you what you can borrow. The notes below describe, in general terms, the factors lenders weigh — so that you arrive at that conversation prepared.
What lenders generally look at: your assessable income, existing commitments, dependants, living expenses, and the loan assessed at the lender's buffer rate rather than the advertised rate. Rental income from an investment property is usually counted, but shaded — lenders discount it, and the discount varies.
⚠️ We have removed from this section: a "5× pre-tax income" borrowing-capacity rule with worked dollar figures; a claim that each $10K of rental income adds $50,000–$60,000 of capacity; an ownership-structuring plan for couples aimed at maximising total borrowings; and named lenders characterised as specialising in, or pricing better for, particular borrower types. All of it was credit assistance we are not licensed to provide, and the numbers were not substantiable across lenders.
Self-employed borrowers are generally asked for a longer trading history and full financial statements. What "longer" means differs by lender. Ask a broker.
Overseas income is typically shaded more heavily than domestic income, and the treatment varies significantly between lenders. We do not publish lender-by-lender rates or policies.