Principal & Interest vs Interest-Only Loans: What’s Better for Property Investors?

When structuring a property loan, one of the most important choices an investor faces is deciding between a Principal & Interest (P&I) loan or an Interest-Only (IO) loan. Each option affects cash flow, tax benefits, borrowing power, and long-term portfolio growth.

Neither is inherently better—it all comes down to your investment strategy and financial position.

Here’s how both loan types work and how to decide which one suits your investment journey.

What is a Principal & Interest Loan?

With a P&I loan, you repay both the interest and the principal (the loan balance) right from the start. This results in higher monthly repayments, but the benefit is that you’re steadily reducing your debt over time.

Advantages of P&I loans:

• Builds equity faster – Each payment reduces your loan balance, increasing your ownership in the property.

• Lower total interest paid – Because you’re reducing the principal from day one, you pay less interest over the life of the loan.

• Preferred by lenders – P&I repayments are seen as more stable, potentially improving future borrowing capacity.

• No repayment shock – There’s no sudden jump in repayments after a set period.

What to watch out for:

• Higher monthly repayments – More of your income goes into servicing the loan, reducing surplus cash flow.

• Less flexibility – Cash tied up in repayments may limit your ability to reinvest elsewhere.

Best for: Investors focused on long-term equity growth, stability, and reduced interest costs.

What is an Interest-Only Loan?

An IO loan allows you to pay only the interest for a set period (typically 1–5 years), without reducing the principal. This lowers your monthly repayments during the IO term, which can help free up cash for other investment moves.

Advantages of IO loans:

• Stronger cash flow in the short term – Lower repayments free up funds for other investments or buffers.

• Tax efficiency – Interest on investment loans may be tax-deductible, improving after-tax returns.

• Supports portfolio growth – With lower outgoings, investors can potentially buy more properties sooner.

• More control – Ideal for those reinvesting equity or managing multiple properties.

Risks to consider:

• No reduction in debt during IO period – You’re not building equity through repayments.

• Repayment shock – When the IO term ends, repayments rise as principal payments kick in.

• Higher interest costs over time – Delaying principal repayments increases the total interest paid.

• Stricter lending requirements – Banks tend to assess IO loans more conservatively.

Best for: Investors prioritising short-term cash flow, tax strategy, or portfolio scaling.

Principal & Interest vs Interest-Only: Key Differences

Which Loan Type Is Right for Your Strategy?

There’s no one-size-fits-all answer. The better option depends on your investment goals, risk appetite, and stage of your portfolio.

• If your priority is long-term wealth creation and reduced debt, P&I may be the right fit.

• If you’re focused on cash flow and expansion, IO could give you the flexibility to grow faster.

• Some investors start with IO for flexibility, then switch to P&I when the portfolio matures.

Tip: Make sure your loan structure supports your investment plan—not just the lowest monthly repayment.

Bringing it all together

Your loan choice can significantly influence your investment success. Whether you choose P&I, IO, or a combination of both, the key is aligning your finance structure with your strategy—not just today, but for the years ahead.

Need help aligning your investment loans with your goals? Book your investment session with PropVest and let’s create a finance strategy that supports your growth.