Interest-only is lower now. What happens when principal starts?

The RBA's August 2026 Statement on Monetary Policy says scheduled mortgage and consumer-credit payments rose to just under 12% of household disposable income in the June quarter, close to their 2024 peak. The current cash-rate target is 4.35%.

When cash flow feels tight, an interest-only period can reduce the scheduled repayment now. That can be useful in some structures, but it does not remove the principal or prove the loan is cheaper over its full life.

Lower now, higher later

Moneysmart explains that repayments cover interest during the interest-only period, while the amount borrowed usually does not reduce. When the loan changes to principal and interest, the original amount must be repaid over the remaining term, so the scheduled repayment increases.

The interest rate may also be higher than on a principal-and-interest loan, and total interest over the life of the loan can be higher. The practical comparison is not only today's payment—it is today's payment, the reversion payment and the total cost together.

Moneysmart's worked example

Loan and term — $500,000 over 25 years at a 4.8% comparison rate.

Interest-only option — $2,010 a month for five years, then $3,250 a month.

Principal-and-interest option — $2,875 a month throughout the comparison.

This is Moneysmart's illustration, not a current lender quote. Actual rates, fees, repayment timing and loan terms vary, and a change in rates can change the later repayment again.

Three figures to confirm

Interest-only period — the exact end date and any conditions that apply before it ends.

Principal — the loan amount that will still need to be repaid.

Reversion repayment — the estimated payment once principal-and-interest begins, using the remaining term.

Before you switch

Ask the lender or broker for the current payment, the estimated payment after reversion, total interest and all fees. Stress-test the future payment at a higher rate and decide whether the structure still fits the purpose of the loan.

Sources

Reserve Bank of Australia — Financial Conditions, August 2026 Statement on Monetary Policy

Reserve Bank of Australia — Cash Rate Target Overview

Moneysmart — Interest-only home loans

General information only. This is not financial advice. Loan options and eligibility depend on your personal income, liabilities, assets and lender assessment criteria.