Interest-Only vs Principal & Interest: What $115 a Week Actually Buys You

Two investors buy the same $680,000 new-build house, put down the same 20% deposit, borrow the same $544,000 at the same 6.5%, and rent it out for the same $560 a week. The only thing they choose differently is the loan structure. In year one the interest-only investor pays $97 a week to hold the property; the principal-and-interest investor pays $212 — about $115 more. Both are annualised after-tax holding costs expressed weekly, not contractual weekly payments; the section below explains why that distinction matters. Ten years on, the P&I investor has retired $82,818 of loan principal. The interest-only investor has retired nothing: their balance is still $544,000 at the ten-year mark, assuming all interest is paid and no fees are capitalised.

That's the core of the trade, and it's narrower than the usual "forced savings" pitch suggests. It isn't the whole picture — lenders often price interest-only a little higher, offset accounts change the maths, and fees and refinancing sit outside this comparison. Every figure below comes from Plintha's own deterministic engine — the same code behind every analysis on this site — run on the same price and rent across four scenarios: the new build under each loan structure, and an established equivalent under each. The exact inputs are published alongside this post, so you can reproduce every figure.

The property

A brand-new investment house in Melbourne, on Plintha's default assumptions:

• Purchase price: $680,000, modelled as a new build, so the engine treats it as eligible for both Division 43 construction expenditure and Division 40 assets. Actual entitlement depends on construction cost and a quantity surveyor's asset schedule, not simply on being the first sale.
• Weekly rent: $560 ($29,120 a year) — a 4.28% gross yield, 2.73% net
• Loan: 80% LVR ($544,000), 6.5% interest, 30-year term. This is Plintha's default assumption, not a quoted rate: the RBA has lifted the cash rate during 2026, lenders are still passing that on, and interest-only investor loans are often priced higher. A higher rate raises both weekly figures.
• Marginal tax rate: 37%
• Capital growth: 6% a year — this is what drives every equity figure below
• State: Victoria; held in the investor's own name

Stamp duty is $35,870 (the Victorian general rate on a $680,000 dutiable value — this assumes a single contract, not a house-and-land split where duty may apply to the land only) and estimated land tax is $1,368 a year on the engine's assumed land share. Neither moves with the loan structure, so both sit outside this comparison. What the loan choice changes is the two things below.

One assumption worth stating up front: this models a 10-year interest-only facility. Most Australian IO periods run five years and then revert to P&I over the remaining term, at which point repayments jump sharply. If yours reverts, the comparison below describes the first half of your loan, not all of it.

The two loans, side by side

Two rows do the work here, and one of them is easy to misread.

The after-tax weekly top-up is the modelled annual shortfall on loan and operating costs after tax, expressed weekly. It excludes stamp duty and other upfront costs, and it excludes land tax, which Plintha reports separately. It is also not literally what leaves your account each week: the repayments and costs go out as they fall due, and the refund arrives once a year at tax time — unless you've arranged a PAYG withholding variation, which brings it forward into your pay. Interest-only is $97; P&I is $212 in year one.

The $115 gap is mostly, but not exactly, the principal component of the P&I repayment. Principal averages about $117 a week across year one, and it is not a cost — it's capital repaid to yourself, and the ATO is explicit that only the interest on an investment loan is deductible, never the principal. Three things net off to $115, all on a weekly basis: the $117 of principal, less the $3 a week of interest P&I doesn't pay, plus the $1 a week of tax benefit it gives up by not paying that interest. (Annually those last two are $179 and $66 — small next to $6,080 of principal, which is why the gap sits so close to the principal figure.) And the gap does not stay at $115. Holding the rate constant, interest-only interest stays flat for as long as the facility runs, while P&I interest falls each year — so P&I's deduction shrinks, its after-tax cost rises, and the gap widens. Year one is the cheapest this comparison looks for P&I under these assumptions.

The equity row is the one to read carefully. $537,776 is the equity gained over the decade excluding the $136,000 deposit you put in on day one. Gross equity, before selling costs and tax, is higher: at 6% growth the property is worth $1,217,776 after ten years, so the interest-only investor's total equity is $673,776 and the P&I investor's is $756,594. We report the gain rather than the total because the deposit isn't something the property earned; it's money you already had.

The difference between those two columns is $82,818, and it is exactly the loan principal the P&I investor retired. Growth contributes identically to both — 6% a year on $680,000 doesn't care how you repay the loan.

Over the decade the two loans absorb very different amounts of cash. Interest-only pays $353,600, all of it interest — deductible, but never coming back as equity. P&I pays $412,610, of which $82,818 reduces the loan balance and so lifts your equity — money you hold in the property, not money in your pocket. That's $59,010 more cash into the loan, buying $82,818 of balance reduction. The difference between those two — $23,808 — is interest P&I never had to pay at all, because every principal repayment shrinks the balance the next month's interest is charged on. Tax doesn't enter that reconciliation at all; it belongs in a separate after-tax comparison, which is where the arithmetic gets genuinely awkward.

So is the extra $115 a week worth it?

Honestly: this post can't tell you, and any post that gives you a single number is overreaching.

The tempting move is to project both loans out a decade, subtract the top-ups from the equity, and declare a winner. We're not doing that, because the arithmetic quietly breaks. You cannot hold year-one figures flat for ten years and let the loan amortise: as the P&I balance falls, so does the deductible interest, so does the refund, so the after-tax cost rises year after year. A projection that freezes the year-one refund while shrinking the balance is comparing two things that can't both be true, and it flatters P&I materially. We're not putting a figure on the error either — quantifying it needs the very schedule the flawed projection was avoiding. The honest version needs a year-by-year schedule with the interest, the deduction and the rent all moving.

What the numbers above do say cleanly is this: the interest-only investor's lower weekly cost is real, but a large part of it is deferral rather than saving. For an investor who holds to term it's largely a question of when the capital goes in — though selling, refinancing or putting that cash to work elsewhere are all real alternatives. Be precise about what $82,818 is, though: it's how much lower the P&I loan balance sits after ten years — not the extra cash P&I costs you. Those are different numbers, and the second needs that year-by-year schedule.

Where each structure earns its place

Neither loan is better; they solve different problems, and the stress test shows why. On this property the interest-only weekly cost peaks at $350 under the worst combined shock we model (rate +3%, rent −10%, four weeks vacant). P&I peaks at $413 under the same shock — a heavier number, though part of that weight is principal you're getting back rather than money gone.

• Interest-only buys cashflow and flexibility. If you're holding several properties, mid-renovation, or want to direct spare cash at non-deductible debt — your own home loan — first, the lower weekly commitment is the point. The trade-off is that you build equity only if the market does. The balance never falls on its own.
• Principal & interest buys a falling balance. The balance falls whether or not the suburb runs, and by year ten the balance is $82,818 lower, every dollar of it principal you repaid. The trade-off is roughly $115 a week more in year one at the assumed 6.5% rate — a higher scheduled payment you're committed to regardless of how the property performs.

The 2026–27 twist doesn't change this decision — it changes whether you can afford the property

The usual framing is that the 2026–27 changes kill the case for interest-only on established homes, because interest-only exists to maximise a deductible loss. Run the numbers on the same price and rent with the property class switched to established, bought after 12 May 2026 — the engine also models an older dwelling with more maintenance, less depreciation and a larger land share, so it's the same scenario, not a physically identical house — and that framing doesn't survive.

Interest-only is $115 a week cheaper than P&I on the new build, and $113 a week cheaper on the established one once quarantining bites. Essentially unchanged — because the gap between the two loans was never really a tax gap. Of that $115, only about $1 a week is the extra tax benefit interest-only earns by paying more interest. The rest is repayment structure: principal you either pay or don't.

What the change does hit, hard, is the cost of holding the property at all — under either loan.

Read that as two separate steps, because they happen at different times and for different reasons.

Today, the gap is $80 a week. The established property still gets the negative-gearing salary offset — the change to that doesn't commence until 1 July 2027 — so the loss still reduces your salary tax right now. About $64 of that is tax relief forgone on the smaller depreciation deduction — an established dwelling generally gets no Division 40 plant-and-equipment deduction, because an individual investor can't claim decline in value on previously used assets bought with the property. The other $16 is the extra maintenance, after its own deduction: the modelled maintenance is $1,360 a year higher, but maintenance is deductible, so at 37% it costs about $16 a week net rather than the $26 the gross figure suggests.

From 1 July 2027, another $172 a week lands. That is loss quarantining: for this investor — salary income, no other rental properties — the rental loss stops offsetting that salary, so no refund arrives to soften the interest bill. It is by far the largest item, it hits both loans alike, and at $172 a week it dwarfs the $115 the loan choice is worth. The loss isn't destroyed: under the enacted rules it carries forward against future income from residential property, including the capital gain on sale, and an investor with other residential rental income may still use it now.

The 2026–27 changes materially alter what this property costs to hold. On these numbers they do very little to the gap between the two loans. They reshape which property, not which loan.

One thing that does not drive the weekly figure: land tax. The established scenario carries $408 a year more of it (an older dwelling holds a higher land share of the same price), but Plintha reports land tax separately from the weekly top-up rather than folding it in, so it doesn't move either number above. It's a real cost — just not part of that comparison.

Worth being precise about depreciation, too: it only changes cash while there's a salary offset to claim it against. Once the loss is quarantined it changes the size of the loss carried forward, not what leaves the account that year. An investor with other rental income could still use it immediately, and Division 43 claims reduce the CGT cost base either way, so it never simply disappears.

We work through the change in full in negative gearing after the 2026–27 Budget.

What to take from this

• The weekly difference is a cashflow question. Can you service the higher P&I figure through a rate cycle, or does the interest-only buffer let you sleep? The stressed figures, not the base case, are the ones that test that.
• The equity difference is a discipline question. Will you actually invest the weekly saving from interest-only, or spend it? If it's the latter, P&I is doing the saving for you.
• After 12 May 2026 the tax difference depends on what you're buying, and on when you're asking. On a new build the rental loss keeps offsetting salary. On an established home bought after the cut-off it does so until 30 June 2027 and then stops — under either loan, which is why this changes the cost of the property far more than the choice of loan.
• Check whether your IO period is five years or ten, because that single term changes the shape of everything above.

These are the same figures the live product produces for this property. Put your own price, rent and loan structure through it at plintha.com.au/analyse and see the after-tax weekly cost and the 10-year equity gain for both loans, side by side.

Loan figures use monthly repayments in arrears, the nominal annual rate divided by twelve, compounding monthly. Australian lenders commonly accrue interest daily, so your statements will differ slightly.

This article is general information, not financial, tax, credit or legal advice — it doesn't take into account your objectives, financial situation or needs. Figures use Plintha's default assumptions (80% LVR, 6.5% interest, 30-year term, 37% marginal rate, Victorian duty, standard operating-cost and land-share model) as at 3 October 2026 and move if any of those change. Depreciation figures are the engine's modelled estimates, not a quantity surveyor's schedule. Land tax depends on the Valuer-General's site value and your total Victorian landholdings, not on the purchase price alone. Confirm your own position with a licensed mortgage broker, tax agent or financial adviser before acting.