Interest-only is a structure, not a recommendation. It lowers your repayment during the IO period because you’re not paying down the balance, but that same balance still needs to be repaid, over a shorter remaining term once the IO period ends, which is exactly why the repayment can jump noticeably at conversion.
The mechanical difference
| Principal & Interest | Interest Only | |
|---|---|---|
| Scheduled repayment | Pays interest and reduces principal | Generally pays interest only, during the IO period |
| Principal balance | Reduces over time as scheduled | Does not reduce from scheduled repayments during IO |
| Initial cashflow | Generally higher than IO on the same balance/rate/term | Usually lower during the IO period |
| Later repayment | Normal amortising repayment across the agreed term | Can rise materially at IO conversion, same principal, shorter remaining term |
Why the conversion jump is often underestimated
Because the principal hasn’t reduced during the IO years, the same balance now has to amortise over a shorter remaining term once IO ends, which pushes the new P&I repayment up, sometimes substantially. Ask for a written estimate of the post-IO repayment before committing to an IO structure, and factor it into your longer-term budget now, not when the conversion actually happens.
Why IO is used at all
Interest-only lending is common for investment properties, partly for cash-flow and tax reasons that are specific to each borrower’s situation, and it’s also used, more cautiously, in some owner-occupied scenarios such as construction or short-term cash-flow management. Lenders generally price and assess IO differently to P&I, and eligibility can be more restrictive, treat an IO quote and a P&I quote as different products, not just different repayment schedules on the same loan.
What to prepare
- A written estimate of your repayment after the IO period ends
- A budget that accounts for the higher post-IO repayment now, not later
- If it’s a tax-driven decision for an investment property, confirm the strategy with a registered tax adviser
Next step: compare repayments directly in the Calculator Lab‘s Repayments & rate shock tool, then talk with KartikKumar about whether IO genuinely suits your situation.