If you’re navigating the home loan maze in Queensland, one of the significant decisions you’ll face is choosing between interest-only and principal and interest repayments.
With around 20% of new home loans in Australia still being interest-only, and recent lending rule changes affecting how these loans work, understanding what each option means for your situation matters.
Here’s what you need to know to make an informed decision based on your circumstances.
Understanding the Basics: What’s the Difference?
Principal and Interest Loans (P&I)
With a principal and interest loan, every repayment you make includes two parts: the interest charged by your lender, and a portion of the actual amount you borrowed (the principal). This is the traditional approach most Australians take when buying a home.
Think of it like paying off any other debt. You’re reducing what you owe while also covering the cost of borrowing. Over time, your loan balance decreases, you build equity in your home, and eventually, you own it outright.
Interest-Only Loans
An interest-only loan works differently. For a set period (typically one to five years), you only pay the interest charged on your loan. Your repayments don’t reduce the actual loan balance at all. The principal stays exactly the same throughout the interest-only period.
After this period ends, the loan automatically converts to principal and interest repayments. Because you haven’t paid down any of the loan balance and now have less time to repay it, your repayments increase significantly.
The Numbers Tell the Story
Let’s look at a real example to see how these options compare. Consider borrowing $500,000 over 30 years at 5.95% interest (figures are illustrative only and will vary based on your circumstances and lender).
With Interest-Only for 5 Years:
Initial repayments: Approximately $1,149 per fortnight for the first 5 years
After 5 years: Loan balance remains $500,000
Remaining term: 25 years (not 30)
New repayments: Approximately $1,484 per fortnight (an increase of $335)
Total cost over 30 years: Approximately $1,113,666
With Principal and Interest from Day One:
Repayments: Approximately $1,380 per fortnight for 30 years
After 5 years: Loan balance reduced to approximately $460,000
Total cost over 30 years: Approximately $1,076,496
The difference in this example is approximately $37,170 more in total interest with the interest-only option. Additionally, when the interest-only period ends, repayments become higher than if you’d chosen P&I from the start.
Important: These figures are estimates for comparison purposes only. Actual costs depend on your specific loan terms, interest rate, fees, and individual circumstances.
Current Market Conditions in 2025
The lending environment has changed significantly. As of October 2025, interest-only loans typically attract higher interest rates than principal and interest loans. According to Reserve Bank data, the average interest-only rate for new owner-occupier loans is around 6.20%, compared to 5.45% for principal and interest loans (as of October 2025, subject to change).
APRA (the banking regulator) has tightened lending rules. Banks must now verify you can afford principal and interest repayments before approving an interest-only loan, even if you’re only paying interest initially. This means lenders are more cautious about who qualifies.
Interest-only lending currently represents around 21% of new loans, well below the historic peak of 64% for investors back in 2017. The shift reflects both tighter regulations and changing borrower preferences.
If you’re a first home buyer in Queensland, understanding these options is part of making informed decisions about your home loan structure.
Why Some Borrowers Choose Interest-Only
Despite higher rates and stricter rules, interest-only loans have features that suit certain situations.
Lower Initial Repayments
The most apparent feature is lower upfront costs. On a $600,000 loan at 6.5%, you might pay around $3,250 per month interest-only versus approximately $3,850 for principal and interest (figures illustrative only). That’s around $600 per month difference in cash flow.
For property investors, this cash flow difference can be relevant for managing expenses or saving for future investments.
Tax Considerations for Investment Properties
This is where interest-only loans are commonly used for investment properties. In Australia, interest paid on an investment property loan is tax-deductible. Since interest-only loans maximize interest payments (because the principal isn’t reducing), they maximize potential tax deductions.
This approach often works with negative gearing, where rental income is less than property expenses. The rental loss may offset other taxable income, potentially reducing your tax bill. According to Treasury data, roughly 65% of negative gearing benefits go to the top 30% of income earners, meaning higher-income investors typically benefit most from this structure.
Building a Property Portfolio
Many Queensland property investors use interest-only loans to manage multiple properties. By keeping repayments lower, they may qualify for additional loans and build a larger portfolio.
This strategy typically relies on capital growth, where investors accept short-term losses in exchange for potential long-term property value appreciation. However, property values can fall as well as rise, and past performance doesn’t guarantee future results.
Considerations with Interest-Only Loans
No Equity Growth Through Repayments
During the interest-only period, you’re building zero equity through loan repayments. Your only equity comes from property value increases. If the market stagnates or falls, you could end up owing close to or more than your property’s current value.
Payment Increase When the Period Ends
When your interest-only term expires, the payment increase can be substantial. On a $750,000 loan at 5.2% interest-only for five years, repayments might jump from $3,250 to $4,950 per month when converting to principal and interest (figures illustrative only). That’s an extra $1,700 per month, or $20,400 per year, that needs to fit within your budget.
Higher Total Interest Costs
You’ll typically pay significantly more interest over the life of the loan. Using the earlier example, an interest-only period resulted in approximately $37,170 more in total interest over 30 years compared to principal and interest from the start.
Stricter Lending Rules
APRA expects lenders to only approve interest-only loans for owner-occupiers “where there is a sound and documented economic basis”. You’ll need to provide clear reasons why you’re choosing interest-only and demonstrate you can afford the higher repayments when they commence.
Most lenders now limit interest-only to 80% loan-to-value ratio (LVR), though some specialist lenders allow up to 90-95% with strict criteria. Interest-only also typically attracts higher interest rates, currently 0.2% to 0.5% above P&I rates (as of October 2025).
Why Choose Principal and Interest?
Building Equity from Day One
Every payment reduces your loan balance, increasing your ownership stake in your home. This matters when you want to refinance, borrow against your equity, or sell your property. Lenders typically favor borrowers with strong equity positions, particularly in uncertain markets.
Lower Long-Term Costs
You’ll typically pay substantially less interest over the life of your loan. The sooner you start reducing the principal, the less interest accumulates overall.
Lower Interest Rates
Principal and interest loans typically attract better rates. Currently, P&I owner-occupier rates average around 5.45% compared to 6.20% for interest-only (as of October 2025, rates vary by lender and circumstances). Over 30 years on a $500,000 loan, even a 0.5% difference can represent tens of thousands of dollars in savings.
Budget Predictability
Your repayments are more predictable from the start (assuming a fixed rate, or stable variable rates). You won’t face a sudden jump in repayments after five years like interest-only borrowers typically experience.
Want to see how different loan structures affect your repayments? Use our home loan calculator to explore scenarios based on your situation.
Lower Risk Profile
If property values fall or rental income drops, you’re in a stronger position because you’ve been building equity. You also have reduced exposure to interest rate rises, since a smaller loan balance means less interest is charged on rate increases.
Who Might Consider Each Type?
Interest-Only May Suit:
- Property investors managing tax deductions and cash flow
- Renovators who need short-term payment relief while improving a property before selling
- High-income earners using tax-effective investment strategies
- Portfolio builders managing multiple properties simultaneously
- Short-term owners planning to sell before the interest-only period ends
Principal and Interest May Suit:
- First home buyers building long-term wealth through homeownership
- Owner-occupiers living in the property for the long term
- Conservative investors prioritizing equity growth and lower risk
- Anyone on a tight budget who may struggle with repayment increases later
- Borrowers wanting lower total interest costs over the loan term
These are general categories only. Your individual circumstances, goals, and risk tolerance should guide your decision. If you’re trying to save for a home deposit, understanding these loan types helps you plan for what comes after you buy.
Special Considerations for Queensland Buyers
Queensland property investors should note that interest-only loans are primarily used as an investment strategy. While some lenders offer them to owner-occupiers, they’re becoming increasingly uncommon due to regulatory scrutiny.
For first home buyers in Queensland, the expanded First Home Guarantee scheme now offers property price caps of $1,000,000 in Brisbane and South East Queensland, and $700,000 in regional areas (as of October 2025, subject to eligibility criteria), with just a 5% deposit. This makes principal and interest loans more accessible for getting into the market.
If you’re considering property in areas like Gladstone, understanding the local market conditions alongside your loan structure helps you make informed decisions.
Interest-Only Loan Limits and Restrictions
Lenders impose limits on interest-only periods:
Owner-Occupiers:
Maximum interest-only period: Typically 5 years at a time
Maximum total interest-only over the loan life: Usually 5-10 years
Generally cannot have interest-only in the final 5 years of your loan
Investors:
Maximum interest-only period: Typically 5-10 years at a time
Maximum total interest-only over the loan life: Usually 10-15 years
Some specialist lenders offer up to 10 years continuously
These limits vary by lender and are subject to their lending policies and regulatory requirements.
What Happens When Your Interest-Only Period Ends?
When your interest-only term expires, you have several options:
- Convert to principal and interest (this happens automatically if you take no action)
- Apply to extend with your current lender (subject to approval and eligibility)
- Refinance to a new lender offering interest-only (if you qualify)
- Sell the property
When applying to extend, lenders will reassess your financial situation. If circumstances haven’t improved or you’re near the maximum term, they may decline the extension. There’s no automatic right to extend beyond the initial period.
Making Your Decision
Rather than choosing based solely on interest rates or repayment amounts, start with your goals and circumstances:
For Property Investment: Interest-only can work if you’re targeting capital growth, managing tax deductions, and have strong cash flow to cover potential shortfalls. Make certain you understand negative gearing implications and have a clear strategy for when the interest-only period ends.
For Your Home: Principal and interest is typically the more suitable choice for owner-occupiers. You’ll build equity faster, pay less interest overall, and avoid repayment increases down the track.
The Hybrid Approach: Some borrowers split their loan, with part interest-only (often on investment properties) and part principal and interest (on their home loan). This can balance tax efficiency with equity building, though it adds complexity to loan management.
Important Questions to Consider Before Choosing Interest-Only
- Can I genuinely afford the higher repayments when the interest-only period ends?
- What’s my strategy if property values don’t increase as anticipated?
- Am I choosing this for sound reasons, or just to afford a more expensive property?
- Will the potential tax benefits actually outweigh the higher interest costs in my situation?
- What happens if interest rates rise or my rental income drops?
- How does this fit with my long-term financial goals and risk tolerance?
These questions are worth discussing with a licensed mortgage broker who can assess your specific circumstances and provide personalized guidance.
Understanding Your Borrowing Capacity
Regardless of which loan type you’re considering, understanding your borrowing capacity is an important first step. Lenders assess your ability to service both current interest-only repayments AND the future principal and interest repayments, even if you’re initially only paying interest.
The Bottom Line
Interest-only loans are a specialized financial tool typically best suited to property investors with clear strategies and strong cash flow. The potential tax benefits and cash flow flexibility can be relevant for certain situations, but they come with trade-offs including higher interest rates, more total interest paid, and significant payment increases when the interest-only period ends.
For most Queensland homeowners, particularly first home buyers and owner-occupiers, principal and interest remains the more common and straightforward choice. You’ll build equity from day one, typically pay less interest overall, and avoid the adjustment of repayment increases down the track.
Whatever you’re considering, ensure it aligns with your financial goals, risk tolerance, and long-term plans. Your circumstances are unique, and what works for one borrower may not suit another.
Want to discuss which loan structure might work for your situation? Get in touch with our team to speak with a licensed mortgage broker who understands the Queensland market and can provide guidance based on your individual circumstances.
Disclaimer
Important Information: The information in this article is general in nature and does not take into account your personal financial situation, needs, or objectives. All figures, examples, and rate information are provided for illustrative purposes only and were current as of October 2025. Interest rates, lending criteria, tax laws, and economic conditions change regularly.
This article does not constitute financial, tax, legal, or credit advice. Before making any decisions about home loans or financial products, you should:
- Consider your personal circumstances, goals, and risk tolerance
- Consult with a licensed mortgage broker or financial adviser
- Seek independent tax advice regarding deductibility and tax strategies
- Review current product disclosure statements and loan terms
- Verify current interest rates, fees, and eligibility criteria with lenders
Tax deductibility rules are complex and depend on individual circumstances. The Australian Taxation Office provides guidance on investment property deductions at ato.gov.au. Negative gearing and tax strategies should be discussed with a qualified tax professional.
Economic forecasts and property market predictions referenced in this article are based on third-party sources and historical data. Past performance and current trends are not reliable indicators of future outcomes. Property values can fall as well as rise.
Interest-only loans are not suitable for all borrowers and circumstances. The decision to choose interest-only over principal and interest should be based on thorough assessment of your financial situation, objectives, and ability to service higher repayments when the interest-only period ends.
For specific advice tailored to your situation, speak with a licensed mortgage broker or financial adviser who can assess your individual circumstances and provide appropriate recommendations.
AJ Home Loans Gladstone operates under appropriate licensing arrangements. For licensing details and to discuss your home loan options, please contact us.
