An interest-only investment loan requires the borrower to pay only the interest component of the loan for a set period — typically 1 to 5 years — without reducing the principal. After the interest-only period ends, the loan reverts to principal and interest, and repayments increase.

Why investors use interest-only. The primary reason is tax efficiency. On an investment property, the interest component of the loan repayment is tax-deductible. Principal repayments are not. An interest-only structure maximises the deductible component and minimises cash outflow, improving the property’s net cash position.

Example. On a $600,000 investment loan at 6.5% interest rate:
– Interest-only repayment: $3,250 per month (fully deductible)
– P&I repayment (over 30 years): $3,792 per month (only the interest portion, ~$3,250, is deductible)

Risk. During the interest-only period, the loan balance does not reduce. If property values fall, the investor may owe more than the property is worth at the end of the interest-only period. The transition to P&I repayments can also cause payment shock, particularly in a high interest rate environment.

Appropriate use cases. Interest-only loans suit investors who are negatively geared, prioritise tax deductions, have strong cash flow to manage the eventual P&I increase, or intend to sell the property before the end of the interest-only period.

Not suitable for investors who want to build equity quickly or those with unstable cash flow.