Interest-only expiry cliff — what happens to your investment loan when the IO period ends

Most investment loans in Australia are written with a five-year interest-only (IO) period. During those years the repayment is just the interest — light on cash flow, easy to negatively gear, popular with investors juggling multiple properties.

The problem is what happens after the IO period. The loan reverts to principal-and-interest (P&I) over the remaining term, not the original term. That shorter amortisation window is why almost every IO investor sees a repayment jump of 20–40% when the switch happens.

This article walks through why it happens, how to model it in your own deal, and the structural options you should be discussing with a broker — before the cliff, not after.

General information only. Not credit, tax or investment advice. Your loan structure and options depend on lender policy at the time, your servicing position and your goals. Azure Home Loans provides credit assistance only — ACR 538895, authorised under ACL 390261.

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Why the step-up is so sharp

Take a typical example: a $700,000 loan at 6.5% p.a. with a 30-year term and a 5-year IO period.

• During IO: monthly repayment is roughly $3,792/month (interest only).
• After IO reverts to P&I: the same $700,000 is amortised over the remaining 25 years, and the monthly repayment steps up to roughly $4,725/month.

That is about $933 more per month, or $11,200 more per year, on the same loan balance and the same rate. No policy change is required to trigger it — it is simply the maths of a shorter amortisation window.

Two amplifiers make this worse in practice:

1. Rates are almost never the same. If your original IO rate was a promotional investor rate and the reversion is to a higher standard rate, the gap widens.
2. Multiple loans expire together. Investors often set up several IO loans in the same year, then hit the cliff on all of them at once.

What "cliff" looks like on a deal analyser

If you run the numbers in the Azure Investor Deal Analyser, the Finance step calculates the step-up automatically:

• The Results dashboard shows Current monthly repayments and Repayments after interest-only expiry side-by-side.
• The Stress Lab includes an IO expiry scenario and a combined downside scenario that pairs it with a rate rise and vacancy.
• The Ten-year projection transitions to P&I inside the projection window, so cash contribution and equity build change at the right year.

Reading these three sections together turns "one number I don't like" into "here is the year and month my repayments change, and by how much."

What most investors miss

• The remaining term shortens the amortisation, not the term itself. If you had 30 years originally and take 5 years of IO, you now have 25 years to repay a full loan balance.
• The equity buffer is smaller than it feels. During IO you built equity only from capital growth, not principal repayment. If growth stalls or reverses, you can arrive at reversion with less headroom than you assumed.
• Extending IO is a credit decision, not a right. Lenders assess extensions the same way they assess new loans — servicing, updated income evidence, LVR and often a fresh valuation. If your position is weaker than at origination, an extension may not be available.
• Refinancing to reset IO is not free. Discharge fees, new application fees, LMI (if LVR moved), valuation, and possibly a new fixed-term break cost all apply. Model the payback period, not just the headline rate.

Structural options to discuss before the cliff

None of the below are advice — they are the shortlist of options a broker will usually run through, so you can have an informed conversation. The right pick depends on your servicing, timeline, tax position and goals.

• Split the loan and only keep IO on the deductible portion. Mixed-purpose loans can complicate deductibility later; a clean investment split simplifies both interest deductibility and the eventual reversion.
• Move to P&I earlier by choice. If cash flow allows, switching part of the loan to P&I earlier smooths the cliff and starts building equity through principal repayment sooner.
• Refinance to a fresh IO period at a competitive investor rate. Works when servicing supports it and the rate saving pays back structural costs inside the new IO period.
• Use offset properly during IO. Offset dollars are still yours and can be built up during IO to soften the P&I transition — but they only reduce interest charged, not the contractual balance.
• Sell down or restructure a portfolio property to release equity or reduce total debt before multiple IO loans expire together. This is a strategy decision, not a broker one.

How to run the numbers on your own deal

1. Open the Deal Analyser and enter each loan split with the correct IO period and remaining term.
2. In Results, note the Current monthly repayments vs Repayments after interest-only expiry line.
3. Run the IO expiry stress test and, more importantly, the combined downside scenario (rate rise + vacancy + IO expiry).
4. Read the ten-year projection — the transition year is when cash contribution steps up. Ask: can salary, buffers or rent growth cover it?
5. Read the investment property cash flow calculator pillar guide to check you have the right expenses in the model before drawing conclusions.

Once you have a clear picture, book a broker conversation from the Deal Analyser results dashboard or the Investor Hub to talk options against live credit guides. Prefer a structured review of your file? Send a short enquiry or start on the apply overview.

Related reading

• Investment property cash flow calculator Australia — 2026 pillar guide
• Investor borrowing mistakes that show up late
• Rent shading and second investment property borrowing
• Investor lending — service overview

Not credit or tax advice. Illustrative repayment maths in this article uses a $700,000 loan at 6.5% p.a. and a 30-year term for teaching purposes only — your actual figures depend on your lender, product and file at the time. Confirm strategy with a registered tax agent and get a broker to review your file against current lender policy.