Australia Interest-Only vs P&I Calculator

Two ways to carry the same loan

With principal and interest, every repayment chips away at the balance, so the debt shrinks month by month and the loan clears at the end of the term. With interest only, you pay just the interest for a set period, so the balance does not move at all during that time, and your repayments are lower. This calculator compares the two on the same loan, showing the low interest only repayment, the higher repayment once that period ends, and the extra interest the interest only structure costs you over the full term.

The crucial mechanic is what happens when the interest only period finishes. The full original balance still has to be repaid, but now over a shorter remaining term, which forces the repayment sharply higher. That jump catches borrowers out, and it is the number worth staring at before you sign.

A $600,000 loan with five interest only years

Using the defaults, a $600,000 loan at 6.2 percent over 30 years, with the first 5 years interest only, the calculator produces the figures below. During the interest only phase the repayment is simply the balance times the monthly rate. Afterward, the same $600,000 must amortise over the remaining 25 years, which lifts the repayment by hundreds of dollars a month.

The interest only repayment of $3,100 is around $575 a month lighter than the flat principal and interest repayment. But that relief is borrowed, not free. Once the interest only window closes, the repayment leaps to $3,939, and across the whole loan you pay roughly $44,915 more interest than if you had paid principal and interest from day one. You spent five years not reducing the debt, so the bank charged interest on the full balance for longer.

When interest only earns its keep

For property investors the calculus differs from owner occupiers. Investment loan interest is generally tax deductible while the property is rented, so keeping repayments as interest only maximises the deductible portion and preserves cash for other uses, which pairs naturally with a negative gearing position. Owner occupiers get no such deduction on their home loan, so for them interest only mostly just delays the inevitable and adds cost. My judgement: owner occupiers should reach for interest only only as a short term cash flow bridge, for instance during parental leave, and switch back to principal and interest as soon as they can.

The offset account alternative

Many borrowers reach for interest only when what they actually want is flexibility, and an offset account can deliver that without the long term interest penalty. With a principal and interest loan linked to an offset, money you park in the offset reduces the interest charged while still leaving you free to withdraw it, so you keep cash on hand and keep chipping away at the principal. For an owner occupier wanting a buffer rather than permanently lower repayments, that combination is usually cheaper over the life of the loan than the interest only structure this tool models. Run both scenarios before assuming interest only is the only way to free up cash.

Why does the repayment jump so much after interest only ends?

Because the bank still needs the full balance repaid by the original end date, but you have used up part of the term paying no principal. With the defaults, the entire $600,000 now has to amortise over 25 years instead of 30, so each repayment carries more principal and the monthly figure rises from $3,100 to $3,939. The shorter the remaining term, the steeper the jump.

Can I avoid the jump by extending interest only again?

Sometimes, but lenders reassess your serviceability each time and regulators have tightened interest only lending, so an extension is not guaranteed and can be harder to get than the original approval. Relying on repeated extensions is risky, because if the lender declines, you face the higher principal and interest repayment with no warning. Plan as though the interest only period will end on schedule.