What's the difference between interest-only and principal-and-interest loans?

P&I structure: monthly payment = interest charge + principal amortisation. Over a 30-year P&I loan you pay back the full principal + the cost of the interest. Each year a slightly larger share of each repayment goes to principal as the balance declines. Standard for owner-occupier mortgages.

IO structure: monthly payment = interest charge only. The principal balance stays at $X for the IO period. Once the IO period ends (typically 5 years), the loan converts to P&I for the remaining 25 years, but now amortising over a shorter window, so monthly repayments jump 30-40% on conversion. Plan for the conversion shock or you can't service the loan.

Why investors use IO: tax deductibility. Interest on investment loans is fully deductible against rental income (ITAA 1997 s8-1); principal repayments are NOT deductible. Maximising the deductible portion → more deductions → lower after-tax cashflow drag. APRA tightened IO lending in 2017 (cap of 30% of new lending; max 5-year IO period; tighter LVR + DTI on IO).

Math: $700K loan at 6.4%. P&I monthly: ~$4,378. IO monthly: ~$3,733. Difference: $645/month diverted from principal repayment to your offset / next deposit / portfolio expansion. After 5 years IO converts to P&I over 25 years: monthly jumps to ~$4,704 (higher than original P&I because you're amortising same principal over fewer years). Plan your year-6 cashflow before signing.