Understanding home loans · Guide 04
Principal and interest
vs interest only.
Look beyond the first repayment. Understand how each structure changes the debt and the repayments that follow.
The short answer
Paying down the balance.
Or paying for time.
Principal and interest
Principal-and-interest repayments cover interest and progressively repay the borrowed amount over the agreed term.
Interest only
Interest-only repayments cover interest for an agreed period. Without extra repayments, the principal does not reduce during that period.
The practical differences
| The question | Principal and interest | Interest only |
|---|---|---|
| What does a scheduled payment cover? | Interest and a portion of the debt. | Interest during the agreed interest-only period. |
| Does the debt reduce? | Yes, as principal is repaid. | Not from scheduled interest-only repayments. |
| What happens afterwards? | The remaining balance continues to amortise. | The principal must be repaid over the remaining term, usually increasing repayments. |
| What should I compare? | Rate, term, repayments and total cost. | Rate, interest-only period, later repayments and total cost. |
The interactive example
Look at the repayment now.
Then look at the repayment later.
Change the amount, rates and interest-only period to see both repayment structures over the same overall term.
Monthly repayment illustration
Gold: principal and interestGreen dashed: interest only then principal and interest
Without extra repayments, the interest-only balance is still $500,000 after five years.
Monthly compounding, no fees, no extra repayments or offset. The P&I rate stays constant for the full P&I path and is used for the remaining term after interest only. The separate IO rate applies only during the IO period. Rates are hypothetical, not offers. Actual lender calculations and changing rates may differ. The IO period must be shorter than the total term.
Understand the trade-off
A smaller payment.
Not a smaller debt.
In a hypothetical $500,000 loan with five years of interest only, the scheduled payments during those five years do not reduce the $500,000 principal.
If the total term is 30 years, that balance then needs to be repaid over the remaining 25 years. The calculator shows why the later payment matters as much as the initial payment.
Interest-only pricing can differ from P&I pricing, so the example lets you enter separate rates. It also compares total interest under its constant-rate assumptions.
A few useful answers
Questions worth asking.
Does interest only mean I never repay the principal?
No. You still owe the principal. It is normally repaid over the remaining term after the interest-only period.
Are the two interest rates always the same?
No. Rates can differ. Use the actual product rates when comparing options.
Does a lower initial payment mean the loan costs less?
No. Compare the full term, later repayments, rates and fees. This example isolates the repayment structure under its stated assumptions.
Keep exploring
Clarity, one choice at a time.
Your next step
A little clarity.
A better conversation.
Bring your questions. We can talk through the numbers, features and considerations that matter in your situation.
Sources & further reading
Read the underlying guidance and check the current terms of any loan you are considering.
- ASIC MoneySmart: interest-only home loans (opens in a new tab) ↗
- ASIC MoneySmart: choosing a home loan (opens in a new tab) ↗
General educational information only. It does not consider your personal objectives, financial situation or needs. Examples are hypothetical, are not loan offers and do not assess eligibility. Lender criteria, product terms, fees and charges apply. Seek appropriate advice for your circumstances.