Interest-only loans have long been a popular tool for Australian property investors seeking to maximise cash flow, manage taxation more efficiently, and grow their portfolios. And while 2025 presents a landscape of elevated interest rates and tighter lending policies, interest-only (IO) lending still plays a key role in investor strategy—if used wisely.
In this comprehensive guide, we’ll break down everything you need to know about interest-only investment loans in Australia: how they work, who they suit, key pros and cons, what rates to expect in 2025, and when to refinance into a principal and interest (P&I) loan.
What Is an Interest-Only Investment Loan?
An interest-only loan allows you to repay just the interest portion of your mortgage for a fixed term—typically between 3 and 5 years. During this period, you’re not required to reduce the loan principal.
The result? Lower monthly repayments and increased cash flow, which can be redirected into renovations, new investments, or debt servicing elsewhere. Once the IO period ends, the loan converts to a principal and interest structure, which generally results in significantly higher monthly repayments.
Who Should Use an Interest-Only Loan?
Interest-only loans can be an effective tool for:
1. Cash Flow-Focused Investors
Investors looking to maximise short-term rental income or build a liquidity buffer benefit most from the lower repayments during the IO phase.
2. Negative Gearing Strategists
Since interest-only repayments are 100% tax-deductible on investment loans, IO loans are attractive to those relying on negative gearing to offset taxable income.
3. Short-Term Property Holders
Investors planning to sell within 3 to 5 years (such as renovators or flippers) often use interest-only loans to minimise out-of-pocket expenses before offloading the asset.
4. Aggressive Growth Investors
For those aiming to expand their property portfolio quickly, the lower repayment obligations free up capital for further deposits or renovations.
While IO loans offer flexibility, they are not suitable for everyone. Investors must plan for the post-IO phase, where repayments can rise substantially.
Pros and Cons of Interest-Only Loans for Investors
Benefits
- Improved Short-Term Cash Flow: Only paying interest keeps your monthly commitments low during the IO period.
- Tax Efficiency: 100% of interest repayments are tax-deductible for investment properties.
- Portfolio Growth: Reduced repayments allow you to direct funds into new purchases, renovations, or savings buffers.
- Short-Term Holding Cost Reduction: Particularly useful if you’re buying a property for capital gains and plan to sell within a few years.
Drawbacks
- No Equity Reduction: You’re not reducing your debt during the IO phase—equity only builds if property prices rise or you make voluntary principal repayments.
- Higher Total Interest Over the Life of the Loan: IO loans typically cost more in interest than P&I loans due to slower debt reduction.
- Repayment Shock: At the end of the IO period, monthly repayments jump—often significantly—as you begin paying both principal and interest.
- Stricter Lending Criteria: Lenders typically apply tighter serviceability assessments and higher rates on IO loans, particularly for investors.
Current Interest-Only Loan Rates in Australia (2025)
Interest-only loans generally attract a rate premium compared to P&I loans. Here’s where the market sits in 2025:
| Lender Type | IO Loan Rate Range (2025) | Comments |
| Major Banks (Big 4) | 6.10% – 6.50% | Available at ≤80% LVR |
| Non-Bank Lenders | 6.30% – 6.80% | May offer higher LVR and more lenient servicing |
| Fixed IO Loans (3 yrs) | 6.20% – 6.40% | Ideal for budgeting certainty |
| Variable IO Loans | 6.10% – 6.60% | Flexible, but subject to rate fluctuations |
Note: Rates will vary based on borrower profile, LVR, property type, and lender.
Factors Affecting Interest-Only Rates
- Loan-to-Value Ratio (LVR): Lower LVRs (≤80%) receive better rates and don’t trigger LMI.
- Loan Size: Larger loans (e.g., $1M+) can qualify for sharper pricing, especially from non-bank lenders.
- Loan Term and IO Period: Shorter IO periods and combined loan terms under 30 years may attract better rates.
- Credit History & Income: Strong borrower profiles may unlock discounts or more favourable terms.
Use a mortgage comparison tool or speak to a broker to explore which lenders offer the best IO rates based on your financial goals and property strategy.
When Should You Refinance or Transition to a P&I Loan?
Since interest-only terms are temporary, planning your transition is essential. Waiting until the last minute could expose you to higher rates and cash flow strain.
Key Triggers for Refinancing
- Before the IO Period Ends:
- Refinancing early can extend the IO term or switch you to a more competitive P&I rate.
- This avoids repayment shock when the IO term expires.
- When Rates Drop:
- If market rates fall, refinancing into a lower-rate P&I loan could deliver substantial savings.
- When Equity Increases:
- Improved property values or debt reduction may unlock better LVR tiers, giving you access to cheaper loans.
What If Refinancing Isn’t an Option?
If your circumstances or lender conditions prevent refinancing, consider:
- Building a Cash Buffer: Use the IO phase to save for the higher repayments ahead.
- Raising Rent: Incremental rental increases help offset the jump in repayments.
- Paying Off Other Debts: Eliminating credit cards or personal loans can improve serviceability when your repayments rise.
Can You Extend an Interest-Only Period?
Some lenders allow extensions beyond the initial 3-5 year IO term, but approval depends on:
- LVR and property value growth
- Updated income and expense profile
- Serviceability under current lending rules
- The investor’s strategic rationale for continuing IO repayments
Lenders now take a more cautious approach to IO extensions. If you’re planning to request one, prepare supporting documentation and ensure your property portfolio remains well-leveraged.
Example: Comparing IO and P&I Loans Side-by-Side
Let’s take a $700,000 investment loan at 6.2% p.a. and compare two scenarios:
| Loan Type | Monthly Repayment | Total Interest (Over 30 yrs) | Equity After 5 yrs |
| Interest-Only (5 yrs) then P&I | $3,617 (IO) → $4,355 (P&I) | ~$912,000 | $0 (until P&I starts) |
| Principal & Interest | $4,285 (P&I) | ~$804,000 | ~$82,000 |
As shown, the IO option delivers lower initial repayments and greater cash flow flexibility—but results in higher interest paid long-term and no equity build-up during the IO phase.
Final Thoughts: Should You Choose an Interest-Only Investment Loan?
Interest-only loans can be a powerful lever for property investors—but only if used strategically and with full awareness of the risks.
An IO loan may suit you if:
- You want to maximise short-term cash flow
- You’re building or growing a portfolio
- You benefit from tax deductions through negative gearing
- You have a clear plan for refinancing or exiting before the IO term ends
An IO loan may not suit you if:
- Your strategy depends on long-term capital growth without solid buffers
- You can’t refinance easily due to your income or LVR
- You’re not prepared for significantly higher repayments later on
In any case, it’s crucial to compare interest-only loan products across lenders and run repayment scenarios using a mortgage calculator before committing.
Ready to Find the Best Interest-Only Investment Loan in 2025?
Comparing interest-only investment loan rates is more important than ever in 2025. With rate gaps widening and borrowing rules tightening, understanding how IO loans work—and when to refinance—is critical to protecting cash flow and maximising investment returns.
Take the time to research lenders, consult your broker, and use a home loan comparison calculator to find the right fit for your portfolio.