Interest Only Investment Loan: How It Works for Australian Property Investors in 2026

An interest only investment loan lets you pay only the interest portion of your loan for a set period - typically one to five years - keeping your monthly repayments significantly lower while you focus on wealth building. For Australian property investors, interest only loans are one of the most commonly used financing strategies. You pay only the interest charges each month, meaning your loan balance stays the same during the interest only period, but your out-of-pocket costs drop substantially.

Whether an interest only investment loan suits your situation depends on your strategy, your financial situation, and how you manage your investment loans. This guide covers how interest only loans work, what interest rates look like in 2026, and when they make strategic sense for managing investment loans across your portfolio.

What Is an Interest Only Investment Loan?

An interest only investment loan is a home loan where you only pay the interest on your balance for a set period - without paying down the principal component. During the interest only term, your loan balance does not reduce because you only cover the interest payable on the amount borrowed.

Most Australian lenders offer interest only periods of one to five years for investment home loans. After the interest only period ends, the loan reverts to principal and interest repayments, where you start paying both interest and the principal component each month.

Interest only home loans are available for both owner occupier and investment property purchases, though lenders charge higher interest rates for investment loans with an interest only structure.

Key Features of Interest Only Home Loans

Lower monthly payments during the interest only period (typically 20-40% less than principal and interest repayments)
Loan balance remains unchanged - you are not reducing the loan amount during the interest only term
Set period - the interest only period is fixed (1-5 years), after which the home loan reverts to principal and interest
Interest is deductible for investment loans where the property produces income
Variable or fixed rate - you can choose variable interest rates or lock in a fixed rate for the interest only period

How the Interest Only Period Works

The interest only period is the set period during which you only make interest only repayments on your investment loan. Your monthly payments cover only the interest - you are not making payments towards the principal.

Typical timeline for an interest only investment loan:

Years 1-5 (interest only period): You pay only interest. On a $600,000 home loan at 6.5% interest rates, your monthly repayments are approximately $3,250.
Year 6 onwards (principal and interest): The home loan reverts to principal and interest repayments. Payments increase because you now pay both interest and principal over the remaining term.

What Happens When the Interest Only Period Ends

When the interest only period ends, your home loan automatically reverts to principal and interest repayments. This means higher repayments because you need to pay off the full balance over a shorter remaining term. If your original home loan term was 30 years with a 5-year interest only period, you have 25 years to repay the principal.

Example: On a $600,000 interest only investment home loan at 6.5% interest rates:

During the interest only period: $3,250/month
After reverting to P&I (25 years remaining): $4,053/month
Increase: $803/month (24.7% jump in home loan repayments)

Planning for this transition is critical. Many property investors refinance at the end of the interest only term to secure a new interest only period or restructure their home loan.

Interest Only vs Principal and Interest Repayments

The fundamental difference is whether you reduce your loan balance each month. With principal and interest repayments, part of each payment reduces the loan sooner. With interest only repayments, your payment covers only the interest - leaving the balance unchanged.

Feature	Interest Only Home Loan	Principal and Interest Home Loan
Monthly payments ($600K, 6.5%)	$3,250/month	$3,792/month
Loan balance after 5 years	$600,000 (unchanged)	$549,200
Monthly cash flow advantage	+$542/month	-
Deductible interest (year 1)	$39,000	$38,820
Equity built from repayments in 5 years	$0	$50,800

For property investors focused on growth, the extra $542 per month from an interest only loan can be redirected to an offset account or used to service additional investment loans.

Interest Only Investment Loan Rates in 2026

Interest only investment home loan interest rates are typically 0.25% to 0.60% higher than equivalent principal and interest rates. As of early 2026, variable interest rates for interest only investment home loans range from approximately 6.19% to 7.20% depending on lender, loan amount, and LVR.

Current Interest Rates Landscape

Variable rate (interest only, investment): 6.19% - 7.20%
Fixed rate (2-year, interest only, investment): 5.99% - 6.79%
Variable rate (P&I, investment): 5.89% - 6.89%
Owner occupier interest only home loan rates: 5.79% - 6.59%

The best interest only home loan rates are generally available to borrowers with LVRs below 80%. An owner occupier typically receives lower interest rates than an investor on the same product.

Understanding the Comparison Rate

When comparing interest only home loan interest rates, always check the comparison rate. The comparison rate includes fees over the life of the home loan, giving you a more accurate cost picture. For interest only home loans, the comparison rate factors in the higher repayments once the loan reverts to principal and interest repayments.

Benefits of Interest Only Home Loans for Property Investors

Maximise Cash Flow

Interest only repayments can provide lower repayments in the short term, allowing extra cash to be used for other expenses or investments. On a $600,000 home loan, interest only repayments save approximately $542 per month compared to principal and interest - $6,504 per year. Investors often use the saved cash from an interest only investment loan to pay down more expensive non-deductible debt, such as an owner occupied home loan or personal loans, before tackling deductible investment debt.

Higher Tax Deductions

Interest on an investment home loan is tax deductible for Australian property investors, allowing them to deduct all interest paid on their investment property at the end of the financial year. Because the loan balance stays at maximum during the interest only period, you maintain higher interest deductions for longer. Property investors can offset the interest portion of their repayments against rental income and other property costs, which can reduce their taxable income. For a property investor in the 37% tax bracket with interest only repayments on a $600,000 interest loan, this means approximately $14,430 in annual deductions from interest alone.

If you have a fixed rate loan and pay interest upfront, you might be able to claim a tax break for up to 12 months of prepaid interest, which can increase your tax deductions for that financial year. Speak with your accountant about whether prepaying interest before 30 June makes sense for your situation.

Capital Growth Strategy

Interest only loans align with a capital growth strategy. If your property grows at 5-7% annually, that capital growth builds wealth regardless of whether you pay principal. Directing spare cash to an offset account can generate better returns than reducing a fully deductible investment loan balance. The rental income from the property covers most or all of your interest only repayments, while capital growth does the heavy lifting on wealth creation.

Risks of Interest Only Investment Home Loans

Loan Balance Does Not Reduce

During the interest only period, you build no equity through home loan repayments. If property values stall, you have the same balance and potentially less security. This matters for investors at high LVRs or in low-growth markets.

Higher Repayments After the Interest Only Period

When the interest only period ends, monthly repayments jump 20-40%. Investors who have not planned for this face cash flow pressure. The home loan repayments increase because you repay the full balance over a shorter remaining term.

More Interest Over the Loan Term

Lenders may charge a premium for interest only loans, resulting in higher total interest payable over the life of the loan. Not reducing the balance means more interest paid overall. For a $600,000 home loan with a 5-year interest only period, expect approximately $26,000 more interest over 30 years compared to paying principal and interest from day one. Understanding these costs is essential for calculating your true investment property returns.

Owner Occupier vs Investment: Interest Only Differences

Interest only home loans for an owner occupier differ from investment home loans in several ways:

Interest rates: Owner occupier interest only rates are 0.20-0.40% lower than investment interest rates
Tax treatment: Interest on an owner occupied loan is NOT deductible. Investment loan interest IS. This is why a mortgage broker often recommends P&I on your owner occupied loan and interest only repayments on investment loans. For strategies that use this tax advantage, see our guide to how negative gearing works.
Maximum period: Some lenders cap owner occupier interest only periods at 5 years while allowing longer for investment home loans (up to 10-15 years across extensions), in line with APRA's residential mortgage lending guidelines

Using an Offset Account with Interest Only Home Loans

An offset account alongside an interest only investment home loan is a powerful strategy. Money in your offset account reduces interest charges without technically paying down principal - preserving tax deductibility while reducing interest payable.

Over the interest only period, your offset account balance grows, giving you a buffer for emergencies or future deposits. For an owner occupier, the offset account provides the same interest rate reduction but without the tax deduction benefit on the home loan interest.

How to Calculate Interest Only Repayments

Formula:

Monthly repayment = (Loan amount x Annual interest rate) / 12

Worked example:

Loan amount: $650,000
Interest rate: 6.39%
Monthly repayment: ($650,000 x 0.0639) / 12 = $3,461/month
Compare to P&I on the same home loan: $4,063/month - saving $602/month

Use the PropBoss Loan Repayment Calculator to model different loan amounts, interest rates, and interest only periods. The calculator shows exactly how your home loan repayments change when the interest only period ends. For a focused walkthrough, see the interest-only home loan calculator guide.

When Does an Interest Only Loan Make Sense?

An interest only investment loan makes strategic sense when:

You focus on property appreciation and want to maximise available cash
You still have non-deductible owner occupied debt to eliminate first
You need flexibility to manage interest only repayments across multiple investment loans
You plan to sell within 5-10 years and want to minimise holding costs
Your interest only repayments allow you to hold a property that would be unaffordable on principal and interest

It may NOT suit your personal circumstances when:

You have no other debt and want to build equity via loan repayments
The property is in a slow-growth area where you cannot rely on appreciation
You cannot afford higher repayments when the interest only period ends
You are near retirement and need to reduce total debt levels

Always seek independent advice from a qualified mortgage broker who understands your personal circumstances before choosing between interest only repayments and principal and interest for your investment loans.

Eligibility for an Interest Only Investment Loan

Lenders assess your eligibility for an interest only loan based on several criteria. Importantly, serviceability is calculated at the higher principal and interest repayment rate - not your lower interest only repayments. This means you need to demonstrate you can afford the interest only loan when it reverts to full repayments.

Key eligibility criteria for an interest only investment loan:

LVR below 80%: Most lenders prefer lower loan-to-value ratios for an interest only loan
Strong serviceability: You must pass the interest rate buffer test (usually current rate + 3%) at principal and interest repayments
Clean credit history: Credit approval for an interest only loan requires no defaults or adverse events
Demonstrated income: Lenders verify your income supports both the interest only repayments now and principal and interest repayments later

For investors holding multiple investment loans, each interest only loan application reduces your borrowing capacity. A mortgage broker can help structure your interest only loans to maximise borrowing power across your portfolio.

Frequently Asked Questions

Can you make extra repayments on an interest only home loan?

Yes - most variable rate interest only home loans allow extra repayments without penalty. However, fixed rate home loans may attract break costs. Directing funds to an offset account may be more flexible than making extra repayments directly.

Is interest on an investment loan deductible?

Yes. All interest on a loan used to purchase an investment property producing income is tax deductible. This applies to both interest only loan structures and principal and interest. See our guide to investment property tax deductions for more.

How long can you keep a home loan interest only?

Most lenders allow 1-5 years, with options to apply for extensions. Some lenders allow cumulative interest only periods of 10-15 years for investment home loans. Each extension requires a new credit approval and assessment of your financial situation.

Are interest only home loan interest rates higher?

Yes. Interest only interest rates are typically 0.25-0.60% higher than principal and interest rates. The premium exists because lenders view interest only home loans as higher risk since borrowers are not reducing their debt.

Ready to model your repayments? Use the PropBoss Loan Repayment Calculator to compare interest only vs principal and interest, see how different interest rates affect your monthly payments, and plan for when the interest only period ends.

For current lender pricing benchmarks, see our investment property mortgage rates Australia guide.