A principal-and-interest (P&I) loan is a mortgage where each repayment covers two things: the interest charged on the outstanding balance, and a portion of the principal (the original amount borrowed). Over time, this structure gradually pays off the entire loan.
In the early years of a P&I loan, most of each repayment goes toward interest. As the principal decreases, the interest portion shrinks and more of each repayment goes toward reducing the balance. By the final years, almost all of each repayment is principal reduction.
How It Compares to Interest-Only
With a P&I loan on $500,000 at 6% over 30 years, your monthly repayment would be roughly $3,000. Of that, about $2,500 is interest and $500 is principal in the first month. With an interest-only loan on the same amount, you would pay only $2,500 per month, but your loan balance never decreases.
Over 30 years, a P&I loan costs less in total interest because the balance is being reduced from the start. But the higher monthly repayments reduce your cash flow in the short term.
When P&I Makes Sense for Investors
Some investors choose P&I from the start because:
- Equity builds faster: you are actively paying down the loan, building equity through principal reduction alongside any capital growth
- Lower total interest: you pay less interest over the life of the loan
- Lower risk: a decreasing loan balance means your LVR improves, giving you more of a buffer if property values dip
- Refinancing advantage: a lower LVR can qualify you for better interest rates
The Tax Consideration
For investment properties, only the interest portion of your repayment is tax-deductible. The principal portion is not deductible because it is a repayment of the borrowed amount, not a cost of earning income. This is why some investors prefer interest-only loans, since every dollar of the repayment is deductible. For a deeper look at the tax implications, see our guide to negative gearing explained.
Why It Matters for Landlords
The choice between P&I and interest-only repayments affects your cash flow, your equity growth, and your tax deductions. Most investors assess this decision property by property, factoring in their overall portfolio strategy and personal financial position.
propkt tracks your loan structure and repayment details alongside your property income and expenses, giving you a clear view of each property's cash flow position.