Most investors go interest-only because their broker said it keeps repayments low. Which is true. And then five years pass and the IO period ends and suddenly there's a $700–$1,200 monthly jump with no plan for it.
That's not bad luck. That's just not thinking it through.
IO loans aren't a trick. They're a trade-off. You keep the cash now in exchange for not reducing the debt. The question is whether that trade-off is still working in your favour — or whether you're just holding onto it out of habit.
This edition walks through five stages of using IO properly: why it exists, when it makes sense, when it stops making sense, what to do at rollover, and how to sequence it across a whole portfolio. No blanket answers. Just the framework.
Stage 1: What IO Is Actually Doing
IO doesn't build equity. It preserves cash. That's it.
On a $560,000 loan at 6.2%, your annual IO repayments are roughly $34,720. You pay the interest, the balance doesn't move. Switch to P&I at 6.5% on a 25-year term and you're at about $42,600 a year — with a portion now chipping away at the principal.
- The gap is roughly $7,900 a year — that's what you're preserving by staying IO
- That cash can be redeployed: deposits, savings, serviceability buffer for the next purchase
- IO doesn't mean zero equity growth — if the property grows, so does your equity
- The risk is building a portfolio that's entirely dependent on price appreciation with no debt coming down
The point: IO is a cashflow decision, not a wealth-building one. Its value depends entirely on what you do with the cash it frees up.
Stage 2: When IO Makes Sense
IO makes sense when the cash you're preserving is doing something more valuable than debt reduction would.
That's the test. Not "is the repayment lower?" The actual test.
- You're still acquiring: Every dollar going to principal is a dollar not available for a deposit. If you're adding properties, IO keeps the machine moving.
- The asset has strong growth: On a high-growth property, price appreciation is building your equity faster than small principal repayments ever would. IO is appropriate here, particularly early in the hold.
- You're running a large offset: A well-stocked offset partially substitutes for principal reduction. The math is less obvious, but it holds.
- You're bridging to a commercial transition: Keeping IO across your residential portfolio preserves options before you pivot.
The point: IO makes sense when the preserved cash has a job to do and the asset is pulling its weight. Not just because it's the lower number.
Stage 3: When IO Stops Making Sense
At some point the IO logic runs out. Most investors don't notice until the bill arrives.
- You're done buying: If portfolio expansion is on pause, the main reason for IO disappears. You're not preserving cash for deployment — you're just delaying debt reduction.
- The rate gap is working against you: IO rates typically run 0.2%–0.4% higher than P&I. On a $560,000 loan at 0.3% higher, that's $1,680 a year in additional interest. Small, but it adds up.
- Serviceability isn't the constraint anymore: If your income and cashflow are solid, protecting serviceability via IO is less relevant. You can afford to retire the debt.
- The period is ending anyway: A forced transition at rollover can be more expensive than a planned one. Banks don't always reprice favourably on IO extensions.
The point: IO has a use-by date. Once the conditions that justified it have changed, holding onto it costs you money.
Stage 4: The Rollover Decision
When an IO period ends, you have three paths. Each has real implications.
Option A — Extend IO
- Keeps repayments lower and cashflow intact
- May come with a higher rate — check what the lender is actually offering before assuming continuity
- Requires a fresh credit assessment at today's stress-test rates
- Right call if you're still acquiring or a purchase is imminent
Option B — Switch to P&I
- Repayments go up, but debt starts coming down
- Best suited to lower-growth or stable assets where income certainty matters more than equity preservation
- Think carefully about which property in the portfolio to start reducing debt on first — sequencing matters
Option C — Refinance
- Resets the IO clock with a new lender (typically a fresh 5-year IO term)
- Opportunity to reprice if your current lender is uncompetitive
- Requires LVR to sit inside 80% — most lenders won't do IO beyond that
- Transaction costs apply: discharge, application, potential break costs
- Can be combined with a broader portfolio debt restructure if you have multiple properties
The point: The right option is the one that fits where you are in the plan — not just the one with the lower monthly number. Run the 5-year cost on each option before you decide.
Stage 5: Sequencing IO Across a Portfolio
The mistake most investors make isn't on one property. It's failing to think about IO structure across the whole portfolio at once.
If you hold two IO loans with staggered end dates, you're managing two clocks simultaneously. When they roll over, the decision on each needs to account for the whole — not just the property in front of you.
- Stagger your IO periods deliberately: If both end at the same time, you face two repayment jumps together. Structure them 2–3 years apart if you can.
- Match the IO term to the asset's role: A growth asset in a high-demand market might warrant a second IO extension. An income asset in a regional market might be better served by switching to P&I and retiring the debt.
- Watch your combined LVR: IO loans age without principal reduction. If values haven't moved, your LVR position barely shifts over five years. That matters when you go back to the bank.
- Model the P&I transition early: Don't wait until the month before rollover to figure out what higher repayments do to your cashflow. Build it into the model 12 months out, minimum.
The point: IO strategy is a portfolio decision. The sequence across your assets matters as much as the call on any individual loan.
Sam's Case Study: Two IO Clocks, One Decision
Sam is 41. Two investment properties — a growth-focused house in Brisbane and a regional duplex. Both on IO. He's in what he calls the consolidation phase — no acquisitions planned in the next 24 months.
Where he sits:
| Property | Value | Loan | LVR | IO Rate | Annual IO Repayment |
|---|---|---|---|---|---|
| Brisbane house | $820,000 | $560,000 | 68% | 6.2% | ~$34,720 |
| Regional duplex | $480,000 | $310,000 | 65% | 6.4% | ~$19,840 |
| Total | $1,300,000 | $870,000 | 67% | — | ~$54,560 |
Brisbane IO ends in 18 months. The duplex has three years left.
Sam has three options on Brisbane: extend, switch to P&I, or refinance. He runs the numbers.
Switching to P&I at 6.5% on a 25-year remaining term would take his annual repayment from $34,720 to roughly $42,600 — up $7,900 a year, or $659 a month. That's real money but not catastrophic given his income.
What stops him defaulting to another extension is the portfolio logic. He's not buying anything. The reason he went IO in the first place was to preserve serviceability for acquisitions that have already happened. That reason is gone.
He also clocks the rate gap. His current IO rate is 6.2%. P&I with his lender sits at 6.5%. Not a big gap — but it narrows the case for extending. Refinancing to a competitor might get him a P&I rate of 6.3%–6.4%, which he models but doesn't pull the trigger on given the transaction costs at this LVR.
His call: switch to P&I on Brisbane at rollover. Keep the duplex on IO for its remaining three years and revisit it then — by which point the Brisbane balance will have started moving.
No drama. In five years, the Brisbane loan will have reduced by approximately $38,000 in principal. That's real equity — not price-driven, not dependent on the market doing something useful. Just boring, well-sequenced debt reduction.
That's what the consolidation phase actually looks like.
Reflection
The IO conversation is one where most people have a strong opinion and the wrong framework. It's not "IO is risky" or "IO is smart" — it's whether the trade-off still makes sense for where you actually are. What frustrates me is how many investors carry IO positions they haven't interrogated since the day they signed the loan. The market changes. The strategy changes. The loan doesn't update itself.
If you're within 24 months of an IO rollover, run the numbers now. Not when the letter arrives. The banks move rates, assessments tighten, and the window to make a clean decision closes faster than you'd think.
The investors who build real portfolios aren't necessarily smarter. They just don't wait until they're under pressure to think.
If this was useful, share it with someone who's trying to figure out the same thing. And if you're not on the list yet, you can subscribe at pbco.com.au.
See you next week.
— Alex
This article is for educational purposes only. It does not constitute financial, legal, or tax advice. Everyone's circumstances are different. Please seek professional advice before acting on any of the strategies outlined above.
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Editorial notes:
- P&I repayment estimate (~$42,600/year) assumes a 25-year remaining term on the $560,000 Brisbane loan at 6.5% — confirm or adjust this term assumption before publishing.
- Competitor refinancing rate (6.3%–6.4%) is illustrative — update with current market rates before publishing.
- No "Coming next" section — no confirmed next topic provided.
- Word count: approximately 1,580 words.