Last updated: July 2026 · Reviewed by John Pierre Saliba, Director and Mortgage Broker, MFAA Accredited
Switching from Interest-Only to Principal & Interest
Interest-only loans are common for property investors, lower repayments during the IO period maximise cash flow and tax deductions. But IO periods expire (typically after 5 years), and when they do, your repayments jump significantly as you switch to principal-and-interest over a shorter remaining term. Planning this transition, and using it as an opportunity to refinance to a better rate, is exactly the kind of review we specialise in.
The worst time to think about your IO expiry is when it happens. The best time is 6–12 months before. At that point you have time to refinance to a lender with a competitive P&I rate, potentially extend a new IO period if that still suits your strategy, or restructure the loan entirely. Waiting until the expiry means you're moved to your current lender's revert rate, which is almost never their best rate.
The Repayment Jump at IO Expiry, Worked Example
- Loan balance at IO expiry: $800,000
- Original loan term: 30 years | IO period: 5 years
- Remaining term at expiry: 25 years
- IO repayment (at 6.89%): $4,593/month
- P&I repayment on same loan (25yr remaining, 7.29% revert rate): $5,774/month
- Repayment jump: +$1,181/month (+25.7%)
- After refinancing to 6.49% P&I with new lender: $5,392/month
- Saving vs revert rate: $382/month ($4,584/year)
Options at IO Expiry
Option 1: Switch to P&I at Current Lender
Simplest, no refinance required. But your current lender's P&I rate may not be competitive. Revert rates are often 0.5–1.0% higher than new customer rates. Check your rate before accepting the revert.
Option 2: Refinance to P&I at New Lender
Takes 2–4 weeks but delivers the best rate. This is the most common and most financially beneficial option for borrowers whose IO period is expiring. We compare P&I rates across 50+ lenders and handle the full switch.
Option 3: Extend IO Period
If your investment strategy still benefits from IO, some lenders will extend the IO period, either with your current lender (subject to credit reassessment) or by refinancing to a new lender with a fresh IO period. IO extension is appropriate for investors who are still in accumulation phase and need to preserve cash flow.
Should You Stay IO or Switch to P&I?
- Stay IO if: You're an investor with negative gearing benefits, you need the cash flow, or you have other high-interest debt to clear first
- Switch to P&I if: You're owner-occupier (P&I rates are lower, and interest isn't deductible), your IO purpose has passed, or you want to build equity faster
P&I rates are typically 0.1–0.4% lower than IO rates from the same lender. For owner-occupiers, P&I is almost always the right structure, the interest savings and equity building compound significantly over 20–30 years.
Tax Considerations for Investors
Switching from IO to P&I reduces your deductible interest (because you're now paying down principal). This increases your after-tax cost of the investment. However, you're also building equity faster. Whether the equity gain outweighs the tax saving loss depends on your tax bracket, property growth rate and overall portfolio strategy. We flag this and recommend you confirm with your accountant.
