Interest-only vs principal-and-interest

An interest-only loan means your repayments cover only the interest charge, so the loan balance doesn't drop. P&I (principal and interest) repayments cover the interest plus a slice of the principal, slowly paying the loan down. Investors often choose interest-only for the first 5 years to maximise cashflow and tax deductions (interest is deductible, principal repayments are not) - the catch is that when the IO period ends, your repayments jump sharply because you're now paying down 25 years of principal in 25 years instead of 30. APRA has tightened IO lending standards since 2017, so investors today often pay a slightly higher rate on IO than P&I.