Interest-Only vs P&I: How Much More Interest?

Short answer

An interest-only (IO) period makes a home loan cost more in total interest because you pay nothing off the principal while it lasts, so interest keeps accruing on the full amount for longer. On a typical $600,000 loan at 6% over 30 years, a 5-year IO period adds roughly $45,000 in extra interest versus paying principal and interest (P&I) the whole way, and your repayments then jump by around $270 a month once the IO period ends. The longer the IO period, the bigger the gap.

How interest-only works in Australia

With a P&I loan, every repayment covers the interest and chips away at the balance, so the debt shrinks each month and the interest charged shrinks with it. With an interest-only loan, you pay only the interest for a set period, your balance stays flat, and after that the loan rolls over to P&I for the remaining term.

The catch is that the principal still has to be repaid inside the original loan term. If you have a 30-year loan with a 5-year IO period, you must repay the entire principal over the remaining 25 years, on higher repayments. Because you carry the full balance for longer, total interest is higher. Moneysmart notes IO rates are also often higher than P&I rates, which can widen the gap further.

In practice, owner-occupier IO periods are usually capped at around five years by the big banks, in line with APRA's residential mortgage lending guidance (APG 223). ASIC has long warned consumers about the higher lifetime cost and the repayment "shock" when IO ends.

Worked example: $600k at 6% over 30 years

Same loan, same rate, same total term. The only difference is whether the first five years are interest-only.

Scenario	Repayment (first 5 yrs)	Repayment (after rollover)	Total interest
P&I for 30 years	$3,597/mo	$3,597/mo	~$695,000
5-yr IO, then 25-yr P&I	$3,000/mo	$3,866/mo	~$740,000
Difference	−$597/mo	+$269/mo later	+~$45,000

How the numbers come out:

• P&I monthly repayment: $3,597, the standard True Loan figure for a $600k loan at 6% over 30 years.
• IO monthly repayment (years 1–5): $600,000 × 6% ÷ 12 = $3,000. That's about $597 less per month while it lasts, roughly $35,800 of breathing room over five years.
• After rollover: the full $600,000 must now be repaid over 25 years, lifting the repayment to about $3,866/mo, which is $269 a month more than the straight P&I path.
• Total interest: about $695,000 on the P&I loan versus about $740,000 with the IO period, an extra ~$45,000 over the life of the loan.

So the IO period lowers your early outgoings but raises the total cost. Push the IO period longer, or pair it with a higher IO rate, and the extra interest grows.

Model this in True Loan

True Loan handles the full interest-only → P&I rollover in a single calculation, so you can see the repayment step-up and the lifetime interest side by side.

To build the example above:

1. Set Loan amount to $600,000, rate to 6%, term to 30 years.
2. Set Repayment type to Interest-only, with an IO period of 5 years. The engine automatically rolls the loan to P&I for the remaining 25 years.
3. Read the Total interest and Total cost figures, and check the repayment shown for the post-rollover period.

Then use the comparison tool to put the IO scenario next to a 30-year P&I version of the same loan and see the ~$45,000 difference directly. If you're thinking of using the lower IO repayments to build a buffer, model that buffer instead as an Offset balance (interest accrues on loan minus offset) or as an Extra repayment ($/month). These are two separate inputs in True Loan, and either one will show how a sustained offset or extra payments change the total.

Common questions and mistakes

Does interest-only mean my loan is cheaper? No. Your monthly payment is lower during the IO period, but the total interest over the loan's life is higher because the balance doesn't fall.

Why do repayments jump so much after IO ends? You're repaying the whole principal over a shorter remaining term, so each repayment has to do more work. Budgeting for that step-up matters.

Is the extra interest always ~$45k? No. That figure is specific to $600k at 6% with a 5-year IO period. A bigger loan, higher rate, or longer IO period increases it; a shorter IO period reduces it.

Can owner-occupiers get long IO periods? Generally no. Big lenders typically cap owner-occupier IO at around five years under APRA guidance. Investor terms can differ.

For related reading, see total interest on a $600k loan over 30 years, fixed vs variable total cost, and what happens when a fixed rate expires.

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These figures are estimates for general information only, not financial or credit advice. Rates, fees and your own circumstances will change the result, so check official sources such as moneysmart.gov.au and confirm details with your lender.