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With a principal and interest (P&I) loan, each repayment covers both the interest charged and a portion of the principal. Over the life of the loan, the balance gradually reduces to zero. This is the standard loan structure — most owner-occupier loans in Australia are P&I.Early p
Payment shock occurs when an interest-only period ends and repayments jump significantly. On a $600,000 loan, repayments can increase by $500–$1,100/month depending on the rate and remaining term.
Yes, most IO loans allow voluntary principal repayments. This reduces your balance and the interest-only payment amount. Check your loan terms for any limits on extra repayments.
Banks assess IO loans more conservatively because of the payment shock risk. They test serviceability at the post-IO P&I repayment amount plus the APRA buffer, which means your borrowing power may be lower with an IO loan.
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