Home loan repayments: interest-only vs principal and interest
There are two types of home loan repayment options: principal and interest (P&I), and interest-only (IO).
The repayment type that suits you will depend on your financial situation and your reasons for buying the property in the first place.
What’s the difference between principal and interest and interest-only home loans?
Mortgage repayments
The main difference between P&I and IO home loans has to do with how repayments are calculated.
On principal and interest home loans, you pay off a part of the principal (the amount of money you borrowed to buy your property) and the interest you owe for the period. As you pay off your principal over time, it follows that the amount of interest you pay will decrease over time. However, your repayments will usually be larger than on an interest-only loan.
Interest-only home loans only require you to pay for the interest you owe. For this reason, your mortgage repayments are typically lower, but you won’t reduce your principal loan amount during the interest-only period (typically 5 to 10 years), resulting in your home loan taking longer to pay off.
Interest rates
Typically, you’ll find lower interest rates on principal and interest home loans, compared to interest-only.
According to the Mozo database on 19 September 2024, the average variable rates for owner occupiers and investors with <80% LVR on a loan of $400,000 are:
| Owner occupied, P&I | Owner occupied, IO | Investor, P&I | Investor, IO |
| 6.78% p.a. | 7.37% p.a. | 7.09% p.a. | 7.37% p.a. |
Pros and cons of principal and interest home loans
Pros
- Pay less interest over time
- Typically come with lower interest rates than IO
- You pay off your home loan faster with P&I.
Cons
- P&I repayments are often higher than IO repayments.
Pros and cons of interest-only home loans
Pros
- Lower repayments during the interest-only period (typically up to 5-10 years)
- Claim tax deductions on interest if you’re a property investor.
Cons
- Typically come with higher interest rates
- Pay more interest over time
- You will not pay off the principal, so the amount you owe does not decrease
- You will not increase your home equity unless your property increases in value.
Is it better to pay principal and interest or just interest?
The repayment type you choose should align with your financial goals.
Interest-only home loans are useful for reducing your mortgage repayments over the short term if you need to free up some cash. But, once the interest-only period ends, your repayments will bounce back up again, and you may be faced with paying an even higher interest rate.
Interest-only repayments are also favoured by those on investment home loans, who have specific tax and investment goals, such as buying and reselling properties for profit.
Principal and interest home loans, on the other hand, are a faster way to build up equity in your home and pay off your loan quicker. This makes them more attractive to owner-occupiers.
So, consider your own goals and financial situation before deciding which repayment type suits you best.
Can I switch from principal and interest to interest-only?
Before your lender lets you switch from principal and interest to interest-only, they will assess your finances and make sure that you can afford the increased principal and interest repayments that you will revert back to, after your interest-only period ends.
This means you might have to complete an eligibility assessment, where your lender takes a look at your income and expenses before approving your request.
If your heart is set on paying lower mortgage repayments, but your request to change to interest-only is denied by your lender, then it may be time to consider refinancing. You may be able to find a lower interest rate than the one you’re currently on, negating the need for you to go interest-only altogether.
FAQs about principal and interest
What is principal and interest?
The principal is the total amount of money you borrow. Meanwhile, interest is a fee your loan accrues over its lifetime. Typically, you pay both off at the same time.
Lenders make money off a home loan through the interest accrued.
How to calculate principal and interest repayments?
If you’re trying to calculate principal and interest repayments, you can use an interest calculator. If you’re into maths and want to do the calculations yourself, we list the steps in our Calculate Interest on Loan guide.
It’s a bit of a lengthy process, so make sure you have plenty of paper.
Is it better to pay principal and interest?
By making principal and interest repayments, you’ll have the chance to pay off your loans quicker and pay less interest overall. This is the way to fully pay off and discharge your mortgage.
You also may be given a lower interest rate if you choose a principal and interest home loan.
If you choose an interest only loan, your principal stays the same, and it might take longer to repay the entire loan.
What gets paid first, principal or interest?
When you make a repayment towards your home loan, both principal and interest get paid at the same time. That means your money splits and covers a bit of the interest and principal.
Assuming your interest rate doesn’t change, your total loan balance goes down with each repayment until you pay it off.
If extra repayments are in your budget, consider adding a bit of extra money so you can repay the loan faster.
Use our mortgage repayments calculator to determine how much you would pay under home loans of different types.
Browse great value home loans using our home loan comparison page.
* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
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