Pros and Cons of Interest Only for Investment Cash Flow

Interest only repayments lower what you pay each month, but they don't shrink your debt.

If you own or plan to buy a rental near Lake Jindabyne, cash flow is what keeps the property comfortable to hold. Rent comes in, and the loan, rates, insurance and repairs go out. This article looks at one choice that changes that balance, and what you give up to get it.

What Does Interest Only Do for Investment Property Cash Flow?

An interest only investment loan means you pay just the interest for an agreed period, so your monthly repayment is lower than a principal and interest loan of the same size. The loan balance stays where it was.

As an example, take a $600,000 investment loan at an illustrative rate of 6.75% p.a. Interest only costs about $3,375 a month. Principal and interest over 30 years at the same rate costs about $3,892 a month. That is roughly $517 a month back in your pocket.

Now say the investor puts that $517 into an offset account each month and leaves it there as a buffer for repairs or a quiet stretch with no tenant. After five years the buffer has grown and the loan is still $600,000. Then the loan switches to principal and interest over the remaining 25 years. At the same illustrative rate, the repayment becomes about $4,146 a month, which is around $771 more than the interest only amount. Cash flow was easier early on, and the jump needs to be planned for.

The main cost is that you pay more interest overall than someone paying down the loan. You also carry the full debt into the higher repayment years.

The Downsides of Interest Only on an Investment Loan

The main risks are a repayment jump when the interest only period ends and no reduction in what you owe. Both can hurt if the property doesn't grow in value or your income changes.

A few things to weigh up:

• The repayment rises when the period ends, and it is worked out over a shorter remaining term.
• Because the balance hasn't dropped, your equity only grows if the property value does.
• Lenders set their own interest only terms and rates, so the price of the feature depends on the lender.
• Lending above 80% of the property value generally needs Lenders Mortgage Insurance, which adds a cost.

If your rental income swings with the seasons, as it can in a holiday and snow town, a lower fixed outgoing is handy. But it is still a debt you must repay, so build a buffer first.

How Lenders Count Rental Income and Repayments

Lenders usually count only part of your expected rent, and they test your repayments at a rate well above your actual one. Banks regulated by APRA must assess new borrowers at least 3.0 percentage points above the loan rate.

APRA's guidance is that prudent lenders count no more than 80% of expected rent, to allow for gaps between tenants. Lenders also place less weight on a rental appraisal than on rent actually received.

Interest only doesn't lift how much you can borrow. For these loans, lenders assess repayments as principal and interest over the term left after the interest only period ends. A 30 year loan with five years interest only is tested over 25 years. That usually means a smaller maximum loan than a principal and interest loan would allow. Our borrowing capacity page explains how your own numbers might look.

Offset Account or Redraw: Which Suits Investment Cash Flow?

An offset account cuts the interest charged without changing your loan balance, while a redraw lets you pull back extra repayments you have made. Which suits you depends on how you will use the cash.

With an offset, interest is charged on the loan balance less the offset balance. That lowers the interest you incur. Offset funds don't reduce the loan amount your lender uses for the property value ratio. Some lenders charge a fee or a higher rate for loans with an offset, so compare the full cost.

Redraw needs more care. For tax, interest is judged by how borrowed money is used each time you draw it. If you redraw from an investment loan for something personal, like a holiday, the interest on that part is not deductible. Rules on the tax treatment of offset withdrawals should be confirmed with your accountant.

From the 2027-28 income year, net rental losses on established residential properties bought after 7:30pm AEST on 12 May 2026 can only be deducted against income from residential property, including residential capital gains. Excess losses carry forward. Properties held at that time are grandfathered, and eligible new builds are not affected. Ask your accountant how this applies to you.

If you already hold an investment loan and the repayments feel tight, a refinance or a loan health check can show whether the structure still fits. Our investment loans page covers the options we can access from lenders across Australia.

Matching the Loan to Your Real Budget

Start with what you can comfortably pay if the property sits empty for a few weeks, not what you hope it earns. Then pick the structure that leaves you that room without hiding a larger repayment further down the track.

If money gets tight, you can also ask your lender for hardship help at any time. Under the National Credit Code, a lender must respond to a hardship notice within set time limits.

Want to talk it through with someone local? Call one of our team or book an appointment at a time that works for you. Whether you are in town or on the Snowy side of the range, our Jindabyne mortgage broker team can run your numbers with you.

Frequently Asked Questions