Interest-only vs principal-and-interest: which loan structure fits an investment property in 2026?

How interest-only and P&I repayments actually work

Under P&I, each repayment is split between interest on the outstanding balance and a portion of the principal. The balance falls over time, so the interest component shrinks and the equity in the property grows with every payment.

Under IO, repayments during the interest-only period cover the interest and nothing else. The loan balance stays exactly where it started. Repayments are lower than the equivalent P&I repayment while the IO period runs — but only because the principal is being deferred, not forgiven. When the IO period ends, the loan reverts to principal-and-interest, and the full balance must now be repaid over the years that remain on the term, which is what drives the repayment jump.

Why interest-only appeals to property investors

The logic is tax-shaped. Interest on a loan used to buy an income-producing property is generally deductible; principal repayments are not. An IO structure keeps every dollar of the repayment in the deductible column and frees up cashflow that would otherwise be locked into paying down debt on the investment.

The 2026–27 Federal Budget changed how far that logic carries. For new builds purchased or contracted from 12 May 2026, rental losses remain deductible against salary. Properties owned or contracted before that date are grandfathered under the old rules. But for established properties bought after 12 May 2026, rental losses are quarantined — carried forward against future rental profits or the eventual capital gain, not offset against your salary. The IO tax case is therefore no longer one-size-fits-all: it now depends on which class the property falls into. Plintha classifies every property as grandfathered, new build, or established post-budget, and adjusts the tax modelling accordingly.

The IO expiry cliff: what happens when the interest-only period ends

At expiry, the loan flips to P&I and the untouched principal must be amortised over the shortened remaining term. Repayments rise — often materially — at a moment the borrower does not control. Refinancing into a fresh IO term is possible in principle but never guaranteed; it depends on the lender's appetite and the borrower's position at the time.

A deal that only works while repayments are interest-only is a deal with an expiry date. The question worth answering before purchase, not after, is whether the cashflow survives the flip.

How Plintha stress-tests the P&I flip on every analysis

Plintha's default loan settings are 80% LVR, 6.5% p.a. interest, an interest-only loan, and a 30-year term. Every default is overridable in Advanced, and any figure resting on a default is tagged [ASSUMED] in the report so you can see exactly what was computed and what was assumed.

Every analysis then runs a stress test with three shocks: interest rates up 2%, an extended vacancy, and the interest-only period expiring into principal-and-interest. Every analysis also carries a verdict — Meets Criteria, Conditional, or Below Criteria — with a 0–100 score, and two strategy lenses, Yield and Growth, scored on every property. If a property only stacks up while the IO period lasts, the stress test says so before you buy. The free tier includes one analysis per month, no card required.

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