Interest-Only to P&I: The Loan Rollover Shock Hitting Australian Landlords in 2026

This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.

If your investment loan went interest-only during 2020 or 2021, this year is the one to pay attention to. The five-year IO terms written into the cheap-rate window are now hitting their expiry dates, and the environment they are rolling into looks nothing like the one they were taken out in.

The cash rate sits at 4.10% after the March 17 RBA decision, every Big 4 bank now charges above 6% on advertised fixed rates, and APRA's new debt-to-income cap kicked in on 1 February. The result is a payment shock that is bigger than the textbook 30 to 40 percent uplift, layered on top of refinancing rules that just got tighter for investors.

Here is what actually happens when an IO loan rolls to P&I, the worked numbers across three loan sizes, and the practical options if your rollover date is in the next six months.

What Happens When the Interest-Only Period Ends

When you take out an interest-only loan, you agree to pay only the interest charged for a set period, usually one to five years. Some investor IO terms can run as long as ten or fifteen years across multiple extensions, but five years is the most common. During that period, your loan balance does not move. Every dollar of repayment goes to the lender's interest column.

When the IO period ends, two things happen at once.

First, your loan switches to principal and interest by default. You are now paying down the borrowed amount as well as the interest, so your monthly cost goes up. Second, the new P&I repayment is calculated over your remaining loan term, not the original 30 years. If you took out a 30-year loan with a 5-year IO period, you have 25 years left to repay the full balance. Shorter amortisation period, same balance, higher monthly figure.

Moneysmart's interest-only home loans guide is blunt about this: "At the end of the interest-only period, the loan will change to a principal and interest loan. You'll start repaying the amount borrowed, as well as interest on that amount. That means higher repayments."

In a flat-rate environment, that switch alone delivers the textbook 30 to 40 percent uplift. In an environment where rates have also moved up by 200 basis points or more since the loan was originated, the uplift is sharper.

Why 2026 Is Peak Rollover Year for Investors

Two waves are colliding this year.

The first wave is the 2020 and 2021 IO loan vintage. During that window, the cash rate sat at 0.10% and investor variable rates were widely available in the high threes and low fours. A lot of investors took out interest-only terms specifically to maximise cash flow in the cheap-rate environment, often on a 5-year IO at a 2- or 3-year fix. Those fixed periods rolled off through 2023 and 2024 into a different rate environment, but the loans usually stayed on IO until the full 5-year term ran out. That means the IO expiries themselves are concentrated in 2025 and 2026.

The second wave is what those loans are rolling into. The cash rate is now 4.10%. Big 4 advertised fixed rates have all pushed above 6%, with investor pricing typically running 20 to 30 basis points higher again. The market we covered in our Big 4 fixed rates above 6% post is the same market your IO rollover is repricing into.

The cumulative effect: a typical 2020 IO investor was paying around 3.5% to 4.5% on interest-only. The same loan rolling to a P&I revert in April 2026 is repricing somewhere in the 6.2% to 6.6% range. That is a 200 basis point rate move and a structural switch from IO to P&I happening on the same day.

Worked Repayment Math

Let us put numbers to it. The scenarios below all assume a 30-year original term with a 5-year IO period now expiring, leaving 25 years of P&I to run. The IO rate of 5.20% reflects a typical April 2024 refix on a loan originally written in 2020. The P&I rate of 6.40% sits in the middle of current investor pricing.

$400,000 investment loan. Interest-only repayment at 5.20% is $1,733 per month. Switching to P&I at 6.40% over 25 years lifts that to $2,673 per month. The delta is $940 per month, or roughly $11,280 per year.

$600,000 investment loan. Interest-only repayment at 5.20% is $2,600 per month. The new P&I repayment at 6.40% over 25 years is $4,002 per month. The delta is $1,402 per month, or roughly $16,820 per year.

$800,000 investment loan. Interest-only repayment at 5.20% is $3,467 per month. The new P&I repayment at 6.40% over 25 years is $5,346 per month. The delta is $1,879 per month, or roughly $22,550 per year.

Across all three scenarios, the dollar increase is significantly bigger than the headline rate move suggests. A 1.20 percentage point rate move alone would lift the IO repayment by around 23 percent. The IO to P&I structural switch is what takes the total uplift past 50 percent.

If you own two investment properties with combined lending around $1.2 million, the after-rollover cost lands somewhere close to $30,000 per year above what you were paying on IO. That is the cash flow gap you need to plan for, not the rate move in isolation.

Calculate Your Own Numbers

The scenarios above use representative rates. Your starting IO rate, the new P&I rate, your loan balance and remaining term all matter. Run your own numbers below. Switch between IO and P&I to see the delta on your exact loan.

For a wider view of how the rate environment alone is moving repayments, see our RBA rate rise mortgage calculator, which focuses specifically on what each 0.25% cash rate change costs on a typical loan.

The Three Headwinds Making 2026 Different

Other rollover years have had at least one tailwind. This one has three headwinds at once.

The rate environment. As covered above, you are repricing into a 6%+ market with the cash rate sitting at 4.10%. There is no "refinance to a lower rate" exit available unless your current revert rate is genuinely above market.

The APRA DTI cap. From 1 February 2026, banks can only write 20 percent of new mortgage lending where the debt-to-income ratio is six times or higher. The cap applies separately to owner-occupier and investor portfolios. APRA's activation announcement made the focus on investor lending explicit, noting that the rule is expected to have "greater impact on investors, who typically borrow at higher DTI ratios than owner-occupiers". Loans for new dwellings are exempt, but most investor refinances and IO extensions are not. If you hold multiple properties, your total household debt across all loans counts toward your DTI ratio. Hitting the cap means the bank cannot write your refinance even if you would otherwise pass serviceability.

Negative gearing reform uncertainty. The May 2026 federal Budget is the next scheduled moment where the government could announce changes to negative gearing or the CGT discount. Treasury is actively modelling reform options, and we cover the detail in our negative gearing changes 2026 post. Nothing is locked in. But for a landlord deciding whether to refinance, sell or restructure right now, the policy uncertainty itself is a planning friction.

Your Options at Rollover

There are five practical paths. Most landlords will use a combination of two or three.

Let it roll to P&I and absorb the cost. This is the default if you do nothing. Your loan reverts to your lender's revert rate, which is usually well above the sharpest available variable, and switches to P&I over the remaining term. The cash flow hit is the full delta from the worked examples above. This option preserves your loan structure and avoids refinance costs, but it also leaves you on a non-competitive rate.

Refinance to a new IO term. Possible, but harder than it was. Under the APRA DTI cap, banks have a finite quota of high-DTI loans they can write each quarter. If you already hold multiple investment properties with combined lending greater than six times your assessable income, you may struggle to find a lender willing to extend you another IO term. Brokers report tighter scrutiny on serviceability buffers and on the genuine reason for needing IO. If you can secure a new IO term, you preserve cash flow and full deductibility, but you also push the same rollover cliff out three to five years.

Extend the loan term. Some lenders will let you reset the amortisation back to 25 or 30 years when you switch to P&I. That softens the monthly P&I figure because the principal is being repaid more slowly. The trade-off is that you pay more total interest over the life of the loan. On a $600,000 balance at 6.40%, extending the remaining term from 25 to 30 years drops the monthly repayment by roughly $250 but adds tens of thousands to the lifetime interest cost.

Use offset cash for a partial paydown. If you have meaningful balances in an offset account, repaying part of the principal at rollover reduces the new P&I figure proportionally. The cash you use is no longer earning interest savings against the loan, but the lower principal does ease ongoing serviceability. This is most useful if your offset balance is sitting idle and you do not have a non-deductible owner-occupier loan to apply it to instead.

Sell the property. The hardest option, and not one to take lightly. If your post-rollover cash flow is genuinely unsustainable and you do not have headroom to absorb it, selling resets the equation but triggers capital gains tax and transaction costs. Before going there, run your full position through a cash flow lens.

The cash flow calculator is the right starting point if you want to see whether your post-rollover position is sustainable. For a tighter check on whether your current rent covers the new P&I figure, the break-even rent calculator shows the minimum weekly rent needed to cover all holding costs.

The Tax Angle Is More Nuanced Than "Interest Is Deductible"

Interest on an investment loan stays fully deductible whether you are on IO or P&I. The ATO's interest expenses guidance is clear that you can claim the interest on a loan used to acquire, own or improve a rental property. So the higher interest you start paying after rollover increases your deductible expense column.

But the principal portion of a P&I repayment is not deductible. The ATO treats it as a return of borrowed capital rather than a cost of earning income. That has two practical consequences for your tax position.

First, your total deductible amount actually falls year by year as the principal balance shrinks. On the $600,000 example above, the first year of P&I delivers around $38,000 in deductible interest. By year ten of the new P&I schedule, the interest portion has dropped to around $30,000, even at the same rate. You are still paying $4,000 per month in repayments, but a growing share of it is non-deductible principal.

Second, the negative gearing maths shifts. A property running a deductible loss while on IO may still run a deductible loss on P&I, but the loss is smaller because the principal portion does not count. If you were relying on a particular size of paper loss to absorb against your salary income, run the new numbers. The negative gearing calculator lets you model the after-tax position cleanly, and our rental property tax deductions guide walks through every category of deductible expense at the line-item level.

The framing "interest is deductible anyway" is true but incomplete. A dollar of extra interest returns 30 to 47 cents at tax time depending on your marginal rate. The remaining 53 to 70 cents has to come out of cash flow.

What to Do in the Next Three to Six Months

If your IO period is rolling off this year, the work you do in the lead-up matters more than the work you do at rollover.

Know the exact expiry date and revert rate. Pull your last loan statement. The IO expiry date is on it. So is the variable revert rate that kicks in by default. Both are easy to overlook until they are biting your bank account.

Talk to a broker six months out. Lenders are taking longer to assess investor refinances under the new DTI rules, and the queue gets longer as more 2020 IO loans hit expiry. The earlier you start the conversation, the more options you have.

Model your cash flow at the new P&I rate. Use the calculator above to project the new monthly repayment, then run it through the cash flow calculator alongside your rent and other expenses. If the result is uncomfortable, you have time to adjust.

Check your DTI before the bank does. Add up your total household debt across all loans, divide by your total assessable income. If you are at or above six times, you are in the band APRA is now rationing. That does not make a refinance impossible, but it does make it slower and pickier.

Check your LVR. If your property has appreciated since you took out the loan, your LVR may have dropped below 70%, 60% or even 50%. Lower LVR tiers usually unlock sharper investor pricing.

Track every dollar of interest from rollover day one. Whatever the new repayment becomes, the interest portion of every payment goes into your deductible column at tax time. Get it captured cleanly so your accountant has a clean number, not a year-end reconstruction.

The landlords who come out of this rollover wave in decent shape will be the ones who knew their numbers six months out, not the ones who found out at rollover. propkt helps you track loan interest, rental income and every other deductible expense across each property, so the post-rollover picture is already in front of you instead of buried in spreadsheets. Get started free.

Frequently Asked Questions

What happens when an interest-only loan expires in Australia?

Your loan automatically converts to principal and interest repayments for the remaining loan term. Because no principal has been paid down during the IO period, the new P&I repayment is calculated over a shorter remaining term, which is why the jump is typically 30 to 40 percent. The new rate is also reset to your lender's revert rate unless you actively refinance or renegotiate.

How much will my repayments increase when my IO loan rolls to P&I in 2026?

On a $600,000 investment loan with 25 years remaining, rolling from 5.20% IO (a typical 2020 fix) to 6.40% P&I adds roughly $1,402 per month, which is about $16,800 per year. Smaller and larger loans scale roughly in proportion. The exact figure depends on your starting rate, the new rate, your remaining term and any extra principal already paid.

Can I extend my interest-only period in 2026?

Possibly, but it is harder than it was. From 1 February 2026, APRA caps banks at writing only 20 percent of new mortgage lending where the debt-to-income ratio is six or higher, and the cap applies separately to investor portfolios. Investors with multiple properties or high gearing are most likely to be pushed against the cap. Talk to a broker at least six months before your IO period ends.

Is interest still tax-deductible if my loan rolls to P&I?

Yes. Interest on a loan used to acquire or hold a rental property remains fully deductible whether you are paying interest-only or principal and interest. The principal portion of a P&I repayment is not deductible because it is a return of borrowed capital, not an expense of earning income. So your total deductible amount falls each year as the principal balance shrinks.

Why is 2026 a peak rollover year for investor IO loans?

A wave of investors took out interest-only loans during the 2020 to 2021 ultra-low rate window, often on five-year terms. Those terms are now expiring in 2026 directly into a 6%+ P&I market. The combination of higher rates, shorter remaining amortisation and the new APRA DTI cap is the reason the payment shock is sharper this time around.