What changes in the payment?
A principal-and-interest payment covers interest and reduces the loan balance. An interest-only payment covers interest for an agreed period, so the original debt stays outstanding unless you make separate principal repayments.
$500,000 × 6% ÷ 12 = $2,500 a month, before fees and with no offset.
On a $500,000 loan at 6% over 25 years, P&I repayments are about $3,222 a month from the start. Five interest-only years reduce the initial payment to $2,500, but leave only 20 years to repay principal. The payment then rises to about $3,582 if the rate stays at 6%.
Solid green: principal & interest. Dashed blue: five years interest only, then P&I. $500,000 at 6%, 25 years, no offset or fees. Both finish at zero; the interest-only loan carries more debt along the way.
Test the payment after expiry
The important figure is not just today’s lower payment. Check the payment when principal repayments begin, then test it with a higher interest rate. Your rent or income may rise, but that is an assumption to test.
Choose interest only, enter the years remaining in that period, and inspect the cash-flow forecast around the changeover year. Loan terms include the interest-only period; they are not added together.
How an offset changes the result
An offset reduces the balance on which interest is calculated. With P&I, the scheduled payment normally stays the same and more of it reduces principal. With interest only, a fixed offset reduces the interest payment but does not itself repay the loan.
The calculator holds the entered offset constant. If you expect to withdraw it to cover bills, try a lower balance.
Compare both the cash flow and the debt
Interest only may help manage cash commitments, but it generally means carrying more debt for longer. Compare total interest, the balance at the end of your holding period and the cash you need after expiry.
The refinance comparison also supports remaining interest-only periods. It shows how repayment relief differs from savings after fees and remaining debt.
Sources: Moneysmart interest-only loans and offset accounts.