Interest-only vs principal-and-interest loans for property investors

Interest-only preserves cash and leaves equity growth to the price. Principal-and-interest uses more cash and can grow equity even if the price does not move.

Labelled illustration. Loan $560,000 at 6.5 per cent. Interest-only is about $36,400 a year, and the balance is still $560,000 at the end of the year. Principal-and-interest on a 30-year remaining term is a higher annual payment, and the balance falls. The extra cash out is principal. That principal is not a cost in the economic sense. It is you paying yourself by reducing the debt. It is still cash you must find that year.

For an investor, the interest line is the one that may be deductible while the property is rented or genuinely available for rent. Principal is not an expense. Mixing the two in a “yield” percentage is how a repayment becomes a return.

Moneysmart is blunt: make sure you can afford the higher repayments at the end of the interest-only period. The rate can also be higher than on a principal-and-interest product. You pay nothing off the principal during the period, so a price fall still meets the full original loan.

The RBA’s May 2026 investor bulletin notes that since 2018 around 40 per cent of new investor lending has been interest-only, compared with about 8 to 12 per cent for owner-occupiers. Interest-only is common in investor books. It is not free leverage. It is deferred principal.

The rental yield calculator subtracts interest-only interest on price × LVR. Its caption says principal repayments are not included. A cash-flow-positive result there can become negative on a principal-and-interest quote. The rentvesting calculator keeps the investment loan interest-only and amortises the home loan over 30 years. That is why the owner-occupier path can grow equity without a price rise, and the rentvest path cannot, inside the model.

If you want the household test Moneysmart recommends, raise the rate by 2 percentage points on either calculator. That is not APRA’s 3-point serviceability buffer. See borrowing capacity versus affordability.

• Treating an interest-only surplus as the holding-period cash flow.
• Calling principal a cost in a yield percentage.
• Assuming the Districts 15-year rentvesting run means 15 years of interest-only in the market.
• Ignoring that a higher interest-only rate can erase the cash-flow advantage.
• Forgetting LMI and duty still have to be funded regardless of repayment type.

Both calculators take the rate and LVR you type. They do not choose a product for you. The investment path in rentvesting is interest-only so the comparison does not silently amortise one loan and not the other. The notes on that calculator say so. If your actual loan differs, the model is still a scenario, not a repayment schedule.

A lower year-one payment does not establish that the property is a better investment, that the rent will be achieved, or that the lender will extend the interest-only term. It does not establish after-tax position. Interest deductibility still depends on use of the funds and on the 2026 negative-gearing rules from 2027-28.

Get the lender’s quote for the interest-only payment, the term of that period, the rate, and the principal-and-interest payment that applies when the period ends. Put the current payment into the cash-flow worksheet. Put the later payment in a second column. If you cannot fund the second column, the first column is not the strategy. Then re-read how to calculate cash-flow positive.