What is an interest only loan, and what happens when it ends

Every standard repayment does two jobs. Part of it pays the lender interest for the month, and part of it chips away at the debt itself. An interest only loan drops the second job. The monthly payment gets smaller, and in exchange the debt stops shrinking. Pay interest only on $600,000 for five years and you still owe $600,000 at the end of them.

How the repayments work

The maths during the period is simple. The lender multiplies your balance by the rate and divides by twelve. On $600,000 at 6.00 per cent, that is $3,000 a month. The same loan on principal and interest over 30 years would cost about $3,597 a month. So interest only frees up almost $600 a month while it lasts, which is exactly why people want it.

You agree the length of the period up front, and one to five years is the usual range. Some lenders will extend it if you apply, but an extension is a fresh credit decision rather than a formality. Expect a slightly higher rate than the same loan on principal and interest, too. ASIC's Moneysmart puts the consequence plainly: you pay more over the life of the loan.

What happens when the period ends

At the end of the period the loan reverts to principal and interest, and the detail that catches people is the term. Your balance has not fallen, but your remaining term has. Borrow over 30 years with five of them interest only, and the full $600,000 now has to be repaid over just 25 years. An untouched debt squeezed into a shorter term is what makes the jump sharp.

The figures below are illustrative. They come from the standard loan formula, on a $600,000 loan at 6.00 per cent over 30 years with a five year interest only period.

The payment jumps by about $866 a month, close to 29 per cent, and it lands in a single statement cycle. It is also about $270 a month more than the loan would have cost on principal and interest from the start, and it stays that way for 25 years. On these numbers, the interest only route costs about $45,000 more in total interest over the life of the loan.

Why investors use them

Two reasons, and they are related. The first is cash flow. Rent on a freshly bought property rarely covers a principal and interest repayment, so a lower payment makes the property cheaper to hold while it grows in value. That is the theory, anyway. It relies on the value actually growing.

The second is tax. On an investment property the interest is generally deductible, while principal repayments are not. Repaying principal shrinks next year's deduction, so many investors keep the investment balance high and point their spare cash somewhere more useful. Usually that means the mortgage on their own home, where interest is not deductible, or an offset account against it. Whether that structure suits you depends on your own numbers. That is a question for an accountant or a licensed adviser, not a general guide like this one.

Why owner occupiers mostly should not

Take away the deduction and the case collapses. On the home you live in, an interest only loan is a dearer loan wearing a cheaper price tag. You pay a higher rate on a debt that never shrinks, then meet a larger repayment over a shorter term.

There are sensible short term uses.

• A gap between buying one home and selling another, which is what bridging finance is.
• A construction loan during the build, which typically runs interest only until completion.
• A planned year on one income while a child is small.

What the sensible cases share is a set end date and a clear route back to paying the loan down. Using interest only to stretch into a house that principal and interest says you cannot afford is the version that goes wrong.

When the regulator stepped in

Interest only lending grew popular enough in the mid 2010s that the banking regulator acted. In March 2017, APRA capped new interest only lending at 30 per cent of each lender's new residential loans. The cap worked. The share of new interest only lending fell well below the threshold, and APRA removed the benchmark from 1 January 2019. The regulator said the benchmarks had always been intended to be temporary. Lenders have looked more closely at interest only applications ever since.

Planning for the reversion cliff

The reversion date is known from the day you sign, which makes this the most predictable shock in home lending. Four things are worth doing.

1. Diarise the date and get the number

   Ask the lender for the exact reversion month and the projected new repayment. A real figure, like $3,866, is something you can plan around. Roughly more is not.

2. Rehearse the payment early

   For the last six months of the period, pay yourself the difference into an offset or savings account. If the bigger number does not fit your budget, you have found out while there is still time to act.

3. Shop before the cliff, not after

   Reverting borrowers can often refinance to a sharper rate, or start a fresh 30 year term that spreads the debt out again. A fresh term lowers the monthly payment but adds years of interest, so treat it as a trade rather than a win. Most borrowers put this work in a broker's hands now. Brokers settled a record 81.0 per cent of new residential home loans in the March 2026 quarter, according to the MFAA.

4. Talk to the lender if the number will not fit

   Every lender has a hardship process, and your options are widest before a payment is missed. Doing nothing is the one approach with no upside.

Where to read next

This site is an independent publication. It does not sell loans or take enquiries, and nothing here is personal advice. If you are weighing up loan structures more broadly, start with prime home loans, which covers how lenders price a strong application. Self employed readers comparing documentation options can start with low doc loans. And if the investment property would sit inside your super, SMSF home loans covers the borrowing structure that applies there.

Common questions