Last updated: July 2026 · Reviewed by John Pierre Saliba, Director and Mortgage Broker, MFAA Accredited
Interest-Only Investment Loans in Sydney
Interest-only (IO) loans are the preferred structure for most Sydney property investors, and for good reason. By paying only interest during the IO period, you maximise your tax deduction, preserve cash flow for further investment, and keep your repayments significantly lower than principal-and-interest alternatives. But IO loans require careful lender selection and a clear plan for what happens at expiry.
IO loans are a tool, not a default setting. They work excellently for investors in accumulation phase who need to preserve cash flow and maximise deductions. They work badly for investors who don't have a plan for the IO expiry, or who are paying IO on their owner-occupier loan (where interest isn't deductible, you're just not building equity). IO on investment: often right. IO on your home: almost never right.
Why IO Makes Sense for Investment Properties
- Maximise deductible interest: Every dollar of interest paid on an investment loan is deductible. On IO, you're paying maximum interest, and therefore maximising your deduction
- Lower repayments = better cash flow: The difference between IO and P&I on a $700,000 investment loan is approximately $1,400–$1,800/month. This capital can be redeployed into further investment or offset against your owner-occupier loan
- Debt recycling: IO on investment preserves cash flow to accelerate repayments on non-deductible owner-occupier debt
- Capital growth, not amortisation: Investment property returns are primarily driven by capital growth, not equity building through repayments
IO Period Length, What's Available?
- Standard IO period: 5 years (most common, available from most lenders)
- Extended IO: Up to 10 years available from some lenders
- IO extension: Can often extend at expiry (requires credit reassessment)
- IO via refinance: Refinancing to a new lender with a fresh IO period resets the clock
IO Rate vs P&I Rate
IO rates are typically 0.1–0.4% higher than equivalent P&I rates at the same lender. On a $700,000 loan, 0.3% extra costs $2,100/year. Compare this to the $1,400–$1,800/month repayment saving and the tax benefit from the higher interest, the IO structure almost always provides a net benefit for investors in the accumulation phase.
Worked Example: IO vs P&I, Investment Property
- Investment loan: $700,000 at 6.89% IO
- IO repayment: $4,019/month
- P&I repayment (30yr): $4,610/month
- Monthly saving on IO: $591
- Annual interest (IO): $48,230, fully deductible
- Annual interest (P&I, year 1): ~$47,800, deductible (but reduces over time)
- Effective tax saving on IO interest (37%): $17,845/year
What Happens at IO Expiry?
At the end of your IO period, the loan reverts to P&I, often at the lender's standard variable rate (the "revert rate"), which may be uncompetitive. Your repayments increase significantly because you're now repaying principal over the remaining term (which is shorter than the original 30 years). Options at expiry:
- Accept the P&I revert, simplest but often most expensive
- Negotiate an IO extension with your current lender
- Refinance to a new lender with a fresh IO period and better rate
