Interest-only versus principal and interest.
Interest-only payment
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Principal + interest payment
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Monthly cash-flow saving
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Your breakdown
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Paying the rent on your debt
An interest-only mortgage is exactly what it sounds like: each month you pay only the interest the bank charges, and you repay none of the principal. The loan balance stays frozen. That keeps the monthly payment lower than a standard table loan, but it comes with a hard truth, the full amount you borrowed is still sitting there at the end, waiting to be repaid or refinanced. This calculator puts the two side by side so you can see precisely what you save each month and what you are deferring. The interest-only figure is just the loan multiplied by the monthly interest rate; the principal-and-interest figure is the standard amortising payment that clears the loan over its term.
It is most relevant to property investors, who often deliberately choose interest-only to maximise cash flow, and to owner-occupiers considering a short interest-only period to get through a tight patch.
The cash-flow saving, and what it costs you
The appeal is the monthly gap. By not repaying principal, your outgoing drops, freeing up cash. For an investor, that can be the difference between a property running at a small surplus and a drain on their wallet. But the saving is not free money, it is deferral. Every month on interest-only is a month your equity does not grow through repayment. You are relying entirely on the property rising in value to build wealth, and if prices stall, you tread water. The calculator makes the trade explicit by showing both payments and the difference between them.
A $600,000 loan at 6.5 percent
Take a $600,000 loan at 6.5 percent with a full term of 30 years. Here is how interest-only compares with principal and interest.
Interest-only saves $542 a month against the full repayment, but the $600,000 principal does not move a dollar. The chart contrasts the two monthly payments, with the dark band on the P&I bar showing the principal portion you skip by going interest-only.
Why banks keep it on a short leash
Lenders rarely grant interest-only for the whole life of a loan. They typically approve it in blocks, often one to five years, then reassess and usually require you to switch to principal and interest. When that switch comes, the payment jumps, and on a shorter remaining term the increase can be steep because you now have to clear the same principal in fewer years. That is the moment to plan for, not to be surprised by. There is also a tax thread for investors: interest on a loan for a residential rental has had its deductibility changed in recent years, so check the current rules before assuming the interest cost is fully deductible. And remember New Zealand has no general capital gains tax, but residential property sold inside the bright-line period can be taxable, which matters because the interest-only strategy leans so heavily on eventual capital growth.
My blunt advice for owner-occupiers: treat interest-only as a temporary tool, not a lifestyle. Using it to afford a more expensive house than you could otherwise service is how people end up with a large debt they never chip away at. For investors it can be a legitimate cash-flow strategy, but only if you have a clear plan for the principal, whether that is selling, refinancing, or switching to repayments once the property is cash-flow positive.
Will I pay more interest overall on interest-only?
Yes, usually a lot more. Because the principal never reduces during the interest-only period, you keep paying interest on the full balance the whole time, whereas a repayment loan shrinks the balance and the interest with it. The lower monthly payment is bought with a higher lifetime interest cost, so factor that in rather than looking only at the monthly saving.
Can owner-occupiers get interest-only in New Zealand?
Sometimes, but it is harder than for investors and often tied to genuine short-term need, such as hardship or a renovation period. Banks scrutinise owner-occupier interest-only requests more closely because there is no rental income offsetting the loan, and responsible-lending expectations mean they want to see how you will eventually repay the principal. Expect a limited term and a plan to revert to repayments.