On a $500,000 loan at 6% over 30 years, P&I repayments come to approximately $2,998 per month. After 5 years you have paid down roughly $34,000 of the principal and owe about $466,000. Total interest over the life of the loan is approximately $579,000.
On the same $500,000 loan at 6% but with a 5-year IO period, your monthly repayments during the IO period are $2,500 - about $500 less per month. However, you still owe $500,000 at the end of year 5, and your P&I repayments for the remaining 25 years jump to approximately $3,222 per month because you are repaying the same principal in a shorter time. Total interest over the life of the loan is approximately $630,000 - around $51,000 more than P&I from day one.
| P&I from day one | 5-year IO then P&I | |
|---|---|---|
| Repayment during IO (years 1-5) | $2,998/mo | $2,500/mo |
| Repayment after IO (years 6-30) | $2,998/mo | $3,222/mo |
| Balance after 5 years | ~$466,000 | $500,000 |
| Total interest over 30 years | ~$579,000 | ~$630,000 |
| Extra cost of IO | - | ~$51,000 |
Example based on $500k loan at 6.00% p.a., 30-year term, IO period 5 years. Illustrative only - not a quote.
P&I is the right structure for most owner-occupiers. Every repayment builds equity, you pay less total interest, and you are progressively reducing your exposure. Lenders also offer lower interest rates on P&I loans than IO loans as standard policy. If your goal is to own your home outright and minimise cost, P&I is almost always the answer.
P&I also makes sense for investors who prioritise debt reduction over short-term cash flow optimisation, or who are close to retirement and want to eliminate debt rather than maximise deductions. The certainty of a fixed end date - knowing the loan will be fully paid in 30 years if you keep making repayments - is also a psychological comfort many borrowers value.
Interest only can make sense for investors who are negatively geared and want to maximise tax-deductible interest, who have a specific short-term cash flow need (such as simultaneously funding renovations or carrying two properties for a period), or who are in a bridging situation where they know the property will be sold within a few years.
IO can also be appropriate for borrowers in a genuine short-term income dip who want to reduce repayments temporarily while keeping the loan intact. This should always be a considered, temporary decision rather than a default approach. The total cost is higher and the risks - particularly repayment shock at revert - are real.
Jason and Steve are Adelaide mortgage brokers who give honest, practical advice at no cost to you. No obligation.
The information on this page is general in nature and does not constitute financial advice. Given Finance Pty Ltd (t/a Lendology) ACN 624 144 501 is authorised under LMG Broker Services Pty Ltd ACL 517192.