Interest Only Loans on Investment Property: Still Worth It in 2026?

Interest-only loans were the default structure for Australian investment property for most of the 2010s. At the peak in 2017, over 40% of all outstanding Australian mortgage debt was interest-only. Then APRA intervened, banks repriced IO loans significantly higher than P&I rates, and many investors were told IO was finished. By 2026, the landscape has shifted again — and the question of whether IO loans are right for your investment property is more nuanced than either the enthusiasts or the critics suggest.

This guide covers how interest-only loans work for investment property, the actual numbers on what IO versus P&I costs you, when IO is still the right structure, when it is not, and how to think about the IO versus P&I decision in 2026.

An interest-only investment loan means your monthly repayments cover only the interest on the outstanding loan balance — not the principal. The loan balance stays constant throughout the IO period (typically 5 years, sometimes up to 10 years with some lenders). At the end of the IO period, the loan reverts to principal and interest repayments calculated on the remaining balance over the remaining term.

Example:
Loan: $600,000 at 7.0% interest rate
IO repayment: $600,000 × 7.0% ÷ 12 = $3,500/month or $42,000/year
P&I repayment (30-year term): approximately $3,992/month or $47,904/year
Monthly difference: $492 per month or $5,904 per year

The $492/month difference is the cash flow advantage of IO — and it is fully tax-deductible in both cases (since all interest on investment loans is deductible regardless of loan type). The only difference is that the P&I repayment also reduces the principal, which is not deductible.

The core tax case for IO on investment property is straightforward: principal repayments are not tax-deductible, but interest is. Every dollar of principal you repay reduces your loan balance but does not reduce your taxable income. Every dollar of interest you pay reduces your taxable income dollar for dollar.

At a 47% marginal rate, the annual interest cost of $42,000 generates a $19,740 tax deduction value. The principal component of a P&I loan generates zero additional tax benefit. This is why IO has historically been preferred for investment property during the accumulation phase — it maximises the deductible interest expense and preserves cash flow for additional investment.

The counter-argument: If you are paying off your non-deductible home mortgage at the same time, every dollar of principal in your investment loan that you do not repay is a dollar you could instead put into your home loan offset or redraw — eliminating non-deductible debt faster. The "debt recycling" argument says the right structure during accumulation is IO on the investment, P&I (or aggressive overpayment) on the home. For the full negative gearing framework: negative gearing Australia: the complete guide.

One critical change since 2017 is that IO investment loans now carry a meaningful rate premium over P&I investment loans. In 2016, IO and P&I rates were virtually identical. APRA's 2017 crackdown forced banks to reprice the risk, and IO rates have been 0.3% to 0.7% higher than equivalent P&I rates ever since.

2026 typical rate comparison (investment, 80% LVR):
P&I investment loan: approximately 6.8% to 7.2%
IO investment loan: approximately 7.2% to 7.7%
Rate premium: 0.3% to 0.5%

What the IO rate premium costs on a $600,000 loan:
At 0.4% premium: $600,000 × 0.4% = $2,400 per year additional interest
After-tax cost at 47%: $2,400 × 0.53 = $1,272 per year
This is the real after-tax cost of choosing IO over P&I — approximately $106 per month.

Compare this against the cash flow benefit: $492/month less in repayments but $2,400/year in additional interest. The net cash flow benefit of IO (after the rate premium cost) is approximately $492 - $200 = $292 per month. Still a benefit, but meaningfully less than it appears when comparing IO and P&I at the same rate.

1. You are in the active accumulation phase with a home mortgage. If you own your home with a non-deductible mortgage and are simultaneously holding investment properties, IO on the investment property maximises cash flow to direct at the home mortgage. Paying down non-deductible debt is more valuable than paying down deductible debt. This is the debt recycling strategy at its core.

2. You have strong borrowing capacity and are planning additional purchases. IO preserves equity for the next deposit. On a $600,000 IO investment loan, the equity position remains constant (growing only through capital appreciation). On a P&I loan, equity builds through both appreciation and debt repayment — but if you draw on that equity for the next purchase anyway, the P&I repayments have simply moved money through the system.

3. Your cash flow is tight and you are close to the serviceability limit. IO reduces the repayment serviced for future borrowing assessments in some lenders — though APRA's assessment rate floors mean the servicing benefit is less than it once was. The real benefit here is monthly cash flow management during years when the portfolio is cash-flow negative.

4. The property is newly purchased and likely to be negatively geared for several years. During the negative gearing phase, maximising the interest deduction and minimising cash outflow makes sense. As the property approaches neutral or positive gearing (as rents rise over time), switching to P&I becomes more attractive.

1. You are approaching retirement with significant investment property debt. This is the most common and most damaging IO mistake. Investors who have held IO loans for 15-20 years approaching retirement find themselves with the same loan balances they started with, large interest payments that continue in retirement, and no salary income to offset the losses. The transition from accumulation to debt elimination — switching IO to P&I — must happen 10-15 years before retirement, not at retirement. For the debt elimination framework: how to build wealth through property in Australia.

2. Your home mortgage is paid off. Once you have no non-deductible debt, the primary justification for IO (directing surplus cash to home loan repayment) evaporates. With a zero home mortgage balance, there is no structural reason to prefer IO over P&I — you may as well be building equity in your investment property.

3. The rate premium has risen enough to eliminate the cash flow benefit. At a 0.5%+ IO premium on a $600,000 loan, the after-tax cost is approximately $1,590 per year. Against a raw monthly repayment difference of around $500, the net benefit is shrinking. Run the numbers for your specific loan size and current rate differential before assuming IO is cheaper.

4. The IO period is expiring and reversion to P&I is imminent. When a 5-year IO period expires, the loan reverts to P&I on the same balance over the remaining term (now 25 years, not 30). This creates a "reversion cliff" — monthly repayments jump significantly. Investors who have not planned for this face a cash flow shock. Address this 6-12 months before reversion by either refinancing to a new IO period (if appropriate) or budgeting for the higher P&I repayment.

Many investors who took IO loans in 2019-2021 are approaching their 5-year reversion point. Here is what the numbers look like:

Loan: $600,000, IO at 7.2%, 5-year IO period expiring
IO repayment (years 1-5): $3,600/month
P&I repayment on $600,000 over remaining 25 years at 6.9%: $4,215/month
Monthly increase at reversion: $615/month ($7,380/year)

This is a meaningful increase. At 47% marginal rate, the increased interest cost in the P&I repayments is deductible, but the principal portion is not. The after-tax increase in total monthly outflow is approximately $400-450 per month. Budget for this. Do not be surprised by it.

Refinancing to extend IO: Possible in 2026 but subject to reassessment of serviceability. If your income or property value has changed since the original loan, you may qualify for a fresh IO period with a new lender. A specialist investment property mortgage broker can assess the options. Full loan guide: investment property loans 2026: what you can borrow and how to structure.

Rather than a blanket rule, the right answer depends on your specific situation:

Choose IO if:
You have an outstanding home mortgage (non-deductible debt to eliminate first)
You are under 55 and actively building your portfolio
The rate premium is under 0.4% and you have identified a use for the preserved cash flow
You are cash-flow constrained and IO is needed to sustain the portfolio

Choose P&I if:
Your home mortgage is paid off
You are within 10 years of retirement
The rate premium makes IO more expensive after accounting for the interest cost
You have no planned use for the additional monthly cash flow from IO
The portfolio has reached its target size and you are now in the debt elimination phase

The hybrid approach: Many investors use IO during the active accumulation phase (first 10-15 years of the portfolio), then systematically switch individual properties to P&I as part of a structured debt elimination plan in the decade before retirement. This captures the cash flow flexibility of IO when it is most valuable and transitions to equity building when the exit phase begins.

Book a Strategy Call
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https://www.ausretirementoffice.com.au/book

Disclaimer: The information provided by Australian Retirement Office is general in nature and educational only. It does not constitute financial product advice, legal advice, or taxation advice. Australian Retirement Office does not hold an AFSL. All investments carry risk. Past performance is not a reliable indicator of future returns. Obtain professional advice before making financial decisions.

Related: Investment Property Loans 2026 | Negative Gearing: Complete Guide | Property Investment Calculator | How to Build Wealth Through Property | Property Investment: Complete Guide