Interest-Only vs Principal & Interest — 2026 Lender Attitudes
In 2017, APRA imposed a 30% cap on new interest-only (IO) lending, partly to cool investor demand and reduce systemic risk. The cap relaxed in 2018. In 2026, IO lending is again widely available — but only for the right borrowers. Here’s the practical 2026 landscape.
The Two Structures
- Principal & Interest (P&I): Each payment reduces the loan balance and pays interest. Standard for owner-occupier.
- Interest-Only (IO): Each payment covers only interest; loan balance doesn’t decrease during IO period. After the IO period (typically 5 years, sometimes extendable to 10), the loan reverts to P&I.
Why Investors Prefer IO
- Lower repayments during IO period (interest only, no principal)
- Maximum tax deduction — all of the IO payment is interest, which is deductible against rental income
- More cash flow for further investments or offsetting against owner-occupier debt
- No reduction in deductible debt during IO — keeps the “deductible interest” component large
Why Lenders Are Cautious
APRA’s concern is that IO loans become “ticking time bombs” — when the IO period ends and payments balloon (P&I on a much larger remaining balance), borrowers can struggle.
In 2026, APRA lets banks lend IO but requires:
- IO portion of total new lending stay below 30%
- Stricter serviceability testing on the post-IO P&I payment
- Generally, IO available primarily for investment properties, not owner-occupier
2026 Rates and Spreads
| Loan type | Rate range |
|---|---|
| Owner-occupier P&I | 5.55%–6.10% |
| Owner-occupier IO | 5.95%–6.50% (rarely offered) |
| Investor P&I | 5.85%–6.30% |
| Investor IO | 6.15%–6.65% |
IO loans carry a 0.30–0.40 percentage-point premium. This is the cost of the structure.
When IO Makes Sense
- Investment property held for capital growth, not cash flow — minimize annual outlay, maximize deduction
- Equity recycling strategy — keeping the investment side IO while paying down owner-occupier
- Bridging finance scenarios — short-term arrangement
- Off-the-plan purchase during construction (often automatically IO)
When IO Hurts
- No clear plan for post-IO period — if you can’t service P&I on the full balance after year 5, you’re in trouble
- Owner-occupier purchase — you should be paying down your home loan; IO is rarely justifiable
- Stretched borrower — IO masks how much you really owe; when the reset hits, payments can jump 30%–40%
Each IO extension typically requires reassessment. If your circumstances change (lower income, more dependents, other debts), the lender may decline to extend. You’d then be forced into P&I on the full remaining balance with no principal already paid.
Refinancing Out of IO
If your IO period is ending and you’d like a fresh IO term, you have three options:
- Same lender: request IO extension (typically requires income re-verification)
- Different lender: refinance to a new IO loan elsewhere
- Accept P&I: ride it out
Option 2 — refinancing — is increasingly common as different lenders’ appetites for IO shift quarter to quarter.
Bottom Line
In 2026, IO is alive and well for genuine investors with deliberate strategies. For owner-occupiers, P&I is almost always right. If you take IO, plan for the day it ends — make sure you can service P&I on the full balance, or have a refinance path. Don’t use IO simply to “afford” a property you couldn’t otherwise afford.