An interest-only loan is a facility where the borrower pays only the interest charged each period, with no principal reduction, for a set term. At the end of that term the loan either reverts to standard principal-and-interest (P&I) repayments or is cleared in full at exit.
Bank interest-only lending in Australia sits inside a tight envelope following APRA's 2014 and 2017 interventions: a standard 5 year maximum IO term (up to 10 years at some major banks for investment lending), 80% maximum LVR with lenders mortgage insurance or 70% without it, and serviceability assessed on a P&I basis at the end of the IO period plus a 3% buffer above the actual rate. That end-of-term reassessment materially lowers a borrower's calculated capacity relative to the headline IO rate.
Private lenders use interest-only structures more flexibly, most commonly for bridging, portfolio top-ups, or stabilisation periods, where the loan's exit (a sale or a refinance) clears the principal rather than ongoing amortisation. Pricing on private IO investment lending in 2026 typically sits 7.85 to 10.5% per annum, depending on file profile, LVR, security type, and exit quality.
Interest is either serviced monthly by the borrower or capitalised into the loan balance and paid at exit, depending on the borrower's cash flow and the lender's structure.