Interest-only and principal & interest are two different ways to structure a mortgage, impacting your repayments and overall loan term. Understanding the difference is particularly relevant for property investors in Victoria, as it affects cash flow and long-term financial planning.
With an interest-only loan, as of December 2025, repayments cover only the interest charged on the loan amount. This results in lower monthly repayments initially, which can be attractive for investors seeking to maximise cash flow from a rental property, particularly common in the Melbourne Eastern Suburbs where strong rental yields are sought. However, you aren’t reducing the actual loan amount. Currently in Melbourne, interest-only periods typically last 5-10 years before reverting to principal & interest. A principal & interest loan means each repayment covers both the interest *and* a portion of the original loan amount, gradually reducing the debt. While repayments are higher, you build equity faster. In 2026, we’re seeing lenders increasingly scrutinise borrowers opting for interest-only loans, requiring larger deposits and stricter serviceability assessments. This is partly due to regulatory changes announced for 2027. When selling a property with an outstanding loan, the remaining principal is repaid from the sale proceeds regardless of the loan type. Fletchers’ experience shows that buyers often factor potential loan repayments into their offers, so understanding these structures is valuable when preparing your property for sale.
Choosing between interest-only and principal & interest depends on your individual financial circumstances and investment strategy.