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Interest-only vs principal-and-interest calculator

Compare an interest-only-then-P&I mortgage against a full-term P&I mortgage — see the payment shock and the total interest cost of going interest-only.

Calculator mortgage

Logic updated April 2026

This calculator compares an interest-only-then-principal-and-interest mortgage against a standard principal-and-interest mortgage from day one. The headline insight is the payment shock — the jump in your monthly cost when the interest-only period ends and the full principal must be amortised over a shorter remaining term.

How this is calculated

Formula 

ioPayment = balance × r ; postIoPayment = standard amortisation on full principal over (term − ioYears)

Step-by-step

  1. During the interest-only period, monthly payment = loan amount × monthly rate. The balance does not reduce.
  2. When the interest-only period ends, the full original principal must be amortised over the remaining term using the standard formula
  3. For the comparison P&I path, calculate the standard payment from month one over the full term
  4. Sum interest for both paths and compute the extra interest cost of choosing interest-only
  5. Calculate the payment shock as the dollar and percentage increase from the interest-only payment to the post-IO payment
Rounding mode
ROUND_HALF_UP
Precision
20-digit internal precision (Decimal.js), rounded to 2 decimal places for display
Logic last reviewed

Assumptions & limitations

What this calculator assumes

  • Interest rate is held constant for the full loan term
  • Interest-only period ends sharply and switches to fully amortising P&I
  • Post-IO P&I repays the full original principal over the remaining term
  • No fees, offset accounts, or rate resets are modelled
  • Repayments occur monthly at the end of each period

What this calculator doesn’t account for

  • Does not model rate changes that often happen at the end of an interest-only period
  • Does not include extension fees if the interest-only period is renewed
  • Does not account for tax treatment differences (interest-only is sometimes used for investment properties)
  • Does not model extra repayments during either period
  • Does not include any rate premium that lenders typically charge for interest-only loans

Worked example

A borrower compares a $500,000 30-year mortgage at 6.5%: option A is 5 years interest-only then 25 years P&I; option B is 30 years P&I from day one.

Input Value
Loan amount $500,000
Interest rate 6.5%
Total term 30 years
Interest-only period 5 years

IO payment $2,708/month → post-IO payment $3,376/month — payment shock $668 (24.7%) — extra interest paid ~$83,000

During the 5-year interest-only period, the principal stays at $500,000 and you pay $2,708 a month in interest only. When the IO period ends, the same $500,000 has to be amortised over the remaining 25 years, pushing the payment to $3,376. The standard 30-year P&I option would have started at $3,160 a month and saved tens of thousands in total interest by reducing principal from day one.

Frequently asked questions

What is an interest-only loan?

An interest-only loan is a mortgage where, for an agreed period, your repayments cover only the interest charged on the loan — none of the principal. The balance stays the same throughout the IO period. Once the period ends, repayments switch to principal and interest, usually over the remaining term.

When does interest-only make sense?

Interest-only is most often used by investors who want to maximise tax-deductible interest while preserving cash flow, or by buyers who expect a near-term income increase that will let them comfortably handle the post-IO step-up. For owner-occupiers, the long-term cost is almost always higher than P&I from day one.

What happens when the interest-only period ends?

Two things change at once: the principal starts being repaid, and the remaining term is shorter. Together, those compress the same loan into fewer payments, which is why payments often jump 20–30% overnight. Some lenders allow you to extend the interest-only period, but extensions usually require a serviceability re-test and may carry fees.

Does interest-only save me interest?

No — it costs more. The principal isn't reducing during the IO period, so interest is charged on the full balance for longer. Even after the post-IO P&I period starts, you have less time to amortise, so the cumulative interest paid over the life of the loan is higher than if you'd been paying P&I from month one.

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