Should you choose principal and interest from day one

Discover whether first home buyers should choose principal and interest from day one. Compare costs, build equity faster, and make informed loan decisions.

When you’re taking out your first home loan, one decision stands out above all others: should you pay principal and interest from day one, or opt for an interest-only period to keep your initial repayments lower? It’s a choice that will shape your financial future for decades to come.

Right now, the average Australian first home buyer is 36 years old and borrowing around $554,961 to purchase their first property. With the RBA cash rate currently at 3.60% and median home prices sitting at $831,000, getting into the property market has never felt more challenging.

Nearly 65% of first home buyers expect to experience mortgage stress, defined as spending more than 30% of their income on home loan repayments.

Against this backdrop, the appeal of lower initial repayments through an interest-only period is understandable. However, for most first home buyers, choosing principal and interest repayments from the start provides greater long-term financial security, faster equity building, and significantly lower overall costs.

While an interest-only loan might ease immediate financial pressure, the trade-offs often outweigh the short-term benefits.

This article examines both repayment structures in detail, breaks down the real financial implications with Australian data, and helps you determine which option aligns with your circumstances and goals.

Understanding the two repayment options

Before diving into which option suits you best, it’s important to understand exactly how each repayment type works and what they mean for your financial future.

What is a principal and interest loan

A principal and interest home loan requires you to repay both the amount you borrowed (the principal) and the interest your lender charges you on that amount. Every repayment you make includes both components, which means your loan balance decreases from your very first payment.

The way these home loan repayments work is relatively straightforward. In the early years, a larger portion of your payment goes toward interest, with a smaller amount reducing the principal. As time passes and your loan balance decreases, this ratio gradually shifts.

More of each payment chips away at what you actually owe, and less goes toward interest charges.

Lenders typically structure these loans over 25 to 30 years with consistent repayment amounts (assuming your interest rate doesn’t change on a variable loan). The predictability and immediate debt reduction make this the most common choice among Australian first home buyers who plan to live in their property long-term.

What is an interest-only loan

An interest-only home loan allows you to pay just the interest charges for a set period, usually between one and five years for owner-occupiers. During this time, you’re not paying anything off the principal amount you borrowed, which means your loan balance stays exactly the same.

The appeal is obvious: lower repayments during the interest-only period. For a $450,000 loan, you might pay around $1,146 per month during the interest-only phase, compared to higher principal and interest repayments of approximately $1,897 per month.

That’s a difference of over $750 per month.

However, once your interest-only period ends, your loan automatically converts to principal and interest repayments. Here’s where many first home buyers face a shock: you now have less time to pay off the same amount of principal.

If you had a five-year interest-only period on a 30-year loan, you now must repay the entire principal over just 25 years. This results in significantly higher monthly repayments than if you’d chosen principal and interest from the beginning.

Key differences at a glance

Why some first home buyers think about interest-only

Despite the long-term disadvantages, interest-only loans do appeal to certain first home buyers, particularly those facing immediate financial pressures. Understanding why people choose this path helps clarify whether it might genuinely suit your situation or if it’s simply masking affordability issues.

Cash flow management

Lower initial repayments can ease the financial pressure that comes with entering homeownership for the first time. When you’re already stretching to afford your deposit, paying for conveyancing, covering moving costs, and potentially buying furniture, those extra hundreds of dollars each month can feel like breathing room.

This appeal is particularly strong given recent Finder research showing that 47% of first home buyers paid more than they initially budgeted for their property. Many are already financially stretched, and the prospect of lower repayments seems like a lifeline.

The savings during an interest-only period could theoretically go toward building an emergency fund, covering unexpected repairs, or even making home improvements.

Short-term financial flexibility

Some first home buyers view interest-only periods as a strategic financial tool. They might be in careers where significant pay increases are virtually guaranteed within a few years, such as those completing medical residencies, legal clerkships, or graduate programs with structured progression.

For these buyers, lower repayments now with the certainty of much higher income later can make mathematical sense.

Others might use the freed-up cash flow to aggressively pay down higher-interest debts like credit cards or personal loans. The theory is sound: if you’re paying 20% interest on a credit card and 6.6% on your mortgage, paying down the card first could save money overall.

However, this strategy requires genuine discipline and a concrete plan.

Market entry strategy

With 70% of first home buyers now purchasing with less than 20% deposits, many are using every available tool to break into the property market. Interest-only periods can help buyers qualify for loans they might not otherwise be able to service on paper, though this creates its own risks.

The fear of missing out plays a significant role here. Research shows that 38% of first home buyers in 2025 purchased primarily because they worried property prices would soon become unaffordable.

When you’re racing against rising prices, the lower initial repayments of an interest-only loan can seem like the only way to get your foot in the door before the market moves even further out of reach.

The appeal versus the reality

What seems manageable initially often becomes problematic down the track. The statistics paint a concerning picture: 65% of first home buyers already expect to experience mortgage stress, and 45% of those who recently bought their first home say they regret their decision.

Adding the complexity and future repayment shock of an interest-only loan onto an already stretched financial situation rarely improves outcomes.

The gap between appealing marketing and financial reality is significant when it comes to interest-only loans for first home buyers.

The financial reality of interest-only for first home buyers

Moving beyond the appeal and into the numbers reveals why most first home buyers end up paying significantly more when choosing interest-only periods, even if they seem like the affordable option upfront.

Understanding the rate premium

One fact often overlooked by first home buyers is that interest-only loans typically come with higher interest rates than principal and interest loans. Reserve Bank data from May 2025 shows owner-occupier interest-only rates averaging 6.6% compared to 5.8% for principal and interest loans.

That’s a 0.90 percentage point difference, which might not sound dramatic but compounds substantially over the life of a loan.

Why do lenders charge more for interest-only loans? The answer lies in risk. You’re not building equity through repayments, which means the lender’s security position doesn’t improve over time.

When property values fall or financial hardship strikes, lenders face greater risk of losses. They pass this risk premium directly to you through higher interest rates.

Real-world cost comparison

Let’s examine what this means in actual dollars for typical first home buyer loan amounts.

Example 1: $500,000 loan over 30 years at current average rates

If you choose principal and interest from the start at 5.95% p.a., you’ll pay approximately $1,897 per fortnight. Over the 30-year term, the total cost comes to around $1,047,600 in principal and interest combined.

If you choose a five-year interest-only period at 6.6% followed by principal and interest for the remaining 25 years, you’ll pay about $1,149 per fortnight during the interest-only phase. Once it converts to principal and interest, your repayments jump to approximately $1,484 per fortnight.

The total cost over 30 years reaches approximately $1,113,666.

The difference? An extra $66,066 over the life of your loan, simply for having those lower repayments in the first five years.

Example 2: $600,000 loan with shorter interest-only period

Even with just a two-year interest-only period on a smaller loan, the additional costs add up. On a $600,000 loan at 5% p.a., choosing principal and interest from the start means paying approximately $238 per month and $14,274 in total over five years.

With a two-year interest-only period, your monthly repayments would initially be just $125 before climbing to $347 when reverting to principal and interest. The total cost over those same five years would be $15,480.

That’s more than $1,200 extra for a relatively brief interest-only period.

The repayment shock factor

Perhaps the most significant risk first home buyers face with interest-only loans is the repayment shock when the interest-only period ends. You’ve had years of lower, manageable repayments. Then suddenly, your monthly obligation increases by hundreds of dollars.

For a $450,000 loan, that jump might be from $1,146 per month to well over $1,800 per month, depending on rates. If interest rates have also risen during your interest-only period, the shock is even greater.

Many first home buyers severely underestimate how challenging this adjustment will be, particularly if their life circumstances have changed. Having children, moving to part-time work, or facing unexpected expenses all make the transition harder.

Currently, 18.5% of Australian borrowers are classified as being at extreme risk of mortgage stress. Adding a significant repayment increase into an already tight budget can push households from coping to crisis.

No equity building during interest-only period

During your interest-only period, your loan balance doesn’t decrease by a single dollar. The only way you build equity is if your property increases in value.

While Australian property has historically grown at an average of 5.4% per year over the past three decades, this growth isn’t guaranteed, particularly in the short term.

If you purchased at the peak of a market cycle and property values remain flat or even decline for several years, you could find yourself in a precarious situation. You might owe more than your home is worth, making it impossible to refinance to a better rate or sell without bringing additional cash to settlement.

This lack of equity also limits your financial options. Want to access funds for renovations that would add value to your property? Need to refinance to take advantage of lower rates?

Without equity built through principal repayments, these options become difficult or impossible.

Five-year cost analysis comparison

Based on $500,000 loan. IO at 6.6% p.a., P&I at 5.95% p.a. Assumes property value growth not included in equity calculation.

The compelling case for principal and interest from day one

The evidence overwhelmingly supports principal and interest repayments as the better choice for most Australian first home buyers. Here’s why starting with principal and interest from day one makes financial sense.

Immediate equity building

Every single repayment you make on a principal and interest loan reduces what you owe and increases your ownership stake in your property. This happens automatically without requiring any additional financial discipline or strategy. You’re effectively forcing yourself to save through structured debt reduction.

Within five years of principal and interest repayments on a $500,000 loan, you’ll have paid down nearly $90,000 of principal. Combined with typical property value growth of 5.4% annually, your equity position becomes substantially stronger.

This equity creates a financial buffer and security that interest-only borrowers simply don’t have.

Greater equity also means greater financial flexibility. You’ll have more options when refinancing, potentially qualifying for better rates or different loan products. If you decide to purchase an investment property later or need to access funds for major expenses, that equity becomes a valuable financial resource.

Lower overall interest costs

Principal and interest loans typically offer lower interest rates than their interest-only counterparts, but the savings extend well beyond just the rate difference. You’re reducing the principal from day one, which also reduces the amount on which lenders calculate interest with every payment you make.

This creates a snowball effect. Lower principal means lower interest charges. Lower interest charges mean more of each future payment goes toward principal. More principal paid means even lower interest charges next time.

This virtuous cycle continues throughout your entire loan term.

For a $700,000 loan, choosing principal and interest from the start can save you approximately $46,660 over the life of the loan compared to a five-year interest-only period. That’s money you could use for renovations, investments, or simply achieving financial freedom years earlier.

Faster path to debt freedom

When you start paying principal immediately, you’re chipping away at the debt from day one. This becomes particularly valuable given that the average Australian first home buyer is now 36 years old.

If you’re entering homeownership in your mid-to-late thirties, being mortgage-free by traditional retirement age means you can’t afford to waste years not reducing your principal.

Principal and interest loans also give you the option to make extra repayments that have maximum impact. Every additional dollar you pay goes straight to reducing principal, which compounds your interest savings.

With an interest-only loan, extra payments during the interest-only period often aren’t possible, or they might not provide the same long-term benefits.

The discipline of principal and interest repayments from the beginning also establishes healthy financial habits. You learn to live within your means while simultaneously building wealth through debt reduction.

Predictable repayments

One of the most underrated benefits of principal and interest loans is their predictability. You know what you’re paying each month (or fortnight), and you know that amount is working to reduce your debt. There’s no looming repayment increase waiting several years down the track.

This predictability makes budgeting easier and reduces financial anxiety. You can plan major purchases, career changes, or family expansions knowing exactly what your housing costs will be.

You won’t face the stress of wondering how you’ll manage when your repayments suddenly jump by 40% or more.

In uncertain economic times, this stability becomes even more valuable. You’re not gambling on your future income being sufficient to handle much higher repayments later.

Better refinancing options

The Australian market saw over 155,000 people refinance their home loans in the June 2025 quarter alone. Refinancing can save thousands of dollars by securing lower interest rates or better loan features.

However, your ability to refinance depends heavily on your loan-to-value ratio (LVR).

By building equity through principal repayments, you steadily improve your LVR. This opens access to more competitive interest rates, removes lenders mortgage insurance, and gives you negotiating power with both your current lender and potential new lenders.

First home buyers who start with interest-only periods find themselves locked into less favourable terms because their LVR hasn’t improved at all unless property values have risen significantly.

Stronger financial position

Beyond the direct financial benefits, principal and interest repayments from day one create a stronger overall financial position. You’re building wealth through forced savings every time you make a repayment. You’re creating a buffer against property market fluctuations.

You’re demonstrating financial discipline that future lenders will reward with better rates and terms.

If your circumstances change unexpectedly through job loss, relationship breakdown, or health issues, having built substantial equity provides options. You might be able to access equity through refinancing, sell the property without facing negative equity, or negotiate better hardship arrangements with your lender.

When might interest-only make sense for first home buyers

Despite the strong case for principal and interest repayments, there are specific circumstances where an interest-only period might genuinely serve a first home buyer’s interests. These situations are exceptions rather than rules and require careful planning.

Specific circumstances where interest-only could work

A short-term income disruption with a confident recovery timeline might justify an interest-only period. For example, if you’re completing the final year of specialist medical training and will jump from a registrar salary to a specialist salary in 12 months, the temporary cash flow relief might make sense.

The key word here is “confident”—you need genuine certainty, not optimistic hopes.

Similarly, if you have a confirmed promotion and significant pay rise coming within a specific timeframe, or you’re completing a professional qualification that guarantees higher income, an interest-only period could bridge that gap. However, these situations are less common than first home buyers often believe.

Some borrowers use interest-only periods strategically while aggressively paying down higher-interest debts. If you’re carrying credit card debt at 20% p.a., focusing on eliminating that before attacking your 6.6% mortgage makes mathematical sense.

But this requires genuine financial discipline and a concrete debt elimination plan, not vague intentions.

Finally, very short-term ownership with a clear exit strategy might justify interest-only. If you know with certainty you’ll be relocating for work within two years and plan to sell, keeping repayments lower while building equity through property value growth alone could work.

However, this gambles on property values rising, which isn’t guaranteed.

Critical caveats and warnings

Interest-only should be the exception, not the rule, for owner-occupiers. If you’re using interest-only simply to afford a property that’s otherwise beyond your means, you’re setting yourself up for financial stress.

Any interest-only strategy requires a genuine, documented financial plan, not just a feeling that things will work out. You need to know exactly when your income will increase, by how much, and have contingency plans if things don’t go according to schedule.

Remember that stricter lending criteria apply to interest-only loans because lenders assess your ability to repay over a shorter timeframe. You might find your borrowing capacity is actually lower with an interest-only loan than with principal and interest, defeating the purpose of choosing this option to afford more.

It’s also worth noting that as an owner-occupier, you receive no tax benefits from interest-only loans. Unlike property investors who can claim interest as a tax deduction, first home buyers living in their property pay every dollar of interest from after-tax income with no offset.

Why most first home buyers should avoid interest-only

The statistics paint a clear picture of why interest-only isn’t suitable for most first home buyers. With median home prices at $831,000 and average first home buyer loans of $554,961, affordability is already stretched.

Adding the higher costs and risks of interest-only compounds the challenge rather than solving it.

When 65% of first home buyers already expect mortgage stress, and 45% of recent buyers regret their purchase, taking on additional risk through interest-only repayment structures rarely improves outcomes. The short-term appeal of lower repayments doesn’t outweigh the long-term costs and complications for most first-time buyers.

Making the right choice for your situation

How do you know which path is right for you? The decision between principal and interest and interest-only ultimately depends on your specific financial circumstances, risk tolerance, and long-term goals. Here’s how to make an informed choice.

Questions to ask yourself

Can you afford principal and interest repayments comfortably right now? If the answer is no without significant stretch, you might be looking at properties beyond your genuine price range. The solution isn’t an interest-only loan; it’s potentially thinking about less expensive properties or waiting until your financial position is stronger.

What’s your income stability and growth trajectory? If you’re in a stable job with predictable income, principal and interest makes sense. If you’re genuinely in a high-certainty income growth situation, you might have grounds to think about a brief interest-only period, but this applies to very few first home buyers.

How long do you plan to own this property? If you’re committed to long-term ownership (10+ years), which most first home buyers are, principal and interest is clearly the better choice. The longer your timeframe, the more the cost differences compound.

Do you have emergency funds to cover unexpected costs? Home ownership brings unexpected expenses. If you don’t have savings buffers and you’re relying on low interest-only repayments just to make ends meet, you’re one major repair away from serious financial stress.

Are you genuinely prepared for repayment increases if choosing interest-only? Not in theory, but in practice with money set aside and budgets proven over time?

Financial health check

Calculate 30% of your gross income, which is the threshold where mortgage stress typically begins. If your principal and interest repayments would exceed this amount, you’re likely buying beyond your means regardless of which repayment type you choose.

Factor in all true ownership costs, not just the mortgage repayment. Council rates, water rates, insurance, maintenance, and strata fees (if applicable) all eat into your budget. Many first home buyers underestimate these ongoing costs.

Build in a buffer for interest rate increases. Even though rates have fallen to 3.60% and may fall further, they will eventually rise again. Can you still afford your repayments if rates increase by 1% or 2%?

Getting expert guidance

The complexity of home loans and the significance of this decision make professional advice valuable. A mortgage broker can compare options across multiple lenders, explain the real costs and benefits of different loan structures, and help you understand whether you genuinely need an interest-only period or if it’s masking affordability problems.

Brokers also understand the current lending criteria and can walk you through the application process, ensuring your loan structure aligns with both your immediate needs and long-term financial goals. They’re particularly valuable for first home buyers who haven’t navigated this process before.

Run the numbers thoroughly

Use repayment calculators to model both options with your specific loan amount and current interest rates. Calculate the total interest you’ll pay over the full loan term for each option. The difference is often tens of thousands of dollars, making the choice much clearer when you see the real numbers.

Model different scenarios including interest rate increases, income changes, and unexpected expenses. Understand exactly what your repayments will be when an interest-only period ends, not just what they’ll be during that period.

Decision-making framework

Strategies to maximise benefits of principal and interest

Once you’ve made the smart choice of principal and interest repayments, several strategies can help you pay down your home loan faster and build equity more quickly.

Make extra repayments when possible

Even small additional amounts make a significant difference over time. An extra $50 per week on a $500,000 loan at 6% p.a. could save you over $100,000 in interest and reduce your loan term by more than six years. An extra $100 per week could save you around $175,000 and cut nearly 10 years from your loan term.

Extra repayments go straight to reducing your principal, which immediately reduces the interest lenders charge on your next payment cycle. This creates a compounding effect that accelerates your debt reduction dramatically.

Most lenders allow extra repayments on variable rate loans without penalty. Some also offer redraw facilities that let you access those extra payments if you need them in an emergency, though this should be a last resort rather than a regular practice.

Increase repayment frequency

Switching from monthly to fortnightly repayments is a painless way to accelerate your debt reduction. Because there are 26 fortnights in a year but only 12 months, paying fortnightly results in making 13 monthly payments per year instead of 12.

That extra month’s payment goes entirely to principal reduction.

The beauty of this strategy is that you barely notice it in your budget. Dividing your monthly repayment by two and paying that amount fortnightly feels natural when you’re paid fortnightly, but delivers significant long-term benefits.

Review and refinance strategically

The refinancing boom in 2025, with over 155,000 Australians refinancing in a single quarter, indicates many people are actively seeking better deals. Don’t let loyalty to your original lender cost you thousands in unnecessary interest.

Review your interest rate annually against what’s available in the market. Even a 0.25% reduction can save thousands over the remaining loan term. However, always calculate the break-even point by factoring in any discharge fees from your current lender and application fees with the new lender.

Lower interest rates mean more of each repayment goes toward principal rather than interest, accelerating your equity building without increasing your repayment amount.

Maintain financial discipline

Resist the temptation to extend your loan term when refinancing unless absolutely necessary. Many borrowers restart their 30-year clock multiple times, meaning they’re never actually paying down significant principal.

Keep your loan purpose focused on property ownership, not personal consumption. Don’t refinance to access equity for lifestyle purchases. That equity represents wealth building; spending it on holidays or new cars converts wealth back into consumption.

Build an emergency fund alongside your mortgage repayments. Having 3-6 months of expenses in easily accessible savings means you won’t need to rely on redrawing from your mortgage or falling behind on repayments when unexpected costs arise.

Taking the next step in your home buying journey

When you’re taking out your first home loan, the decision between principal and interest and interest-only repayments shapes your financial trajectory for decades. While lower initial repayments might seem appealing, particularly when you’re already stretching to enter the property market, the evidence clearly shows that most first home buyers benefit substantially from choosing principal and interest from day one.

The numbers don’t lie. Paying tens of thousands of dollars extra over your loan term, building no equity during interest-only periods, facing significant repayment shock, and limiting your future financial flexibility are heavy prices to pay for short-term cash flow relief.

For first home buyers already facing challenges with affordability, adding these extra costs and risks rarely improves outcomes.

Principal and interest loans offer immediate equity building, lower overall costs, faster paths to debt freedom, predictable repayments, and stronger financial positions. These benefits compound over time, creating wealth and security rather than just managing month-to-month cash flow.

If you’re navigating the complex world of home loans and want expert guidance on structuring your first home loan for long-term success, Attain Loans can help. Our experienced mortgage brokers understand the challenges facing Australian first home buyers and can compare options across multiple lenders to find the loan structure that genuinely matches your circumstances and goals.

Don’t make one of the biggest financial decisions of your life without expert advice. Contact Attain Loans today to discuss your home loan strategy and get started on the path to homeownership with confidence.

Starting with principal and interest repayments isn’t just a loan structure decision; it’s a commitment to building long-term wealth and financial security from your very first payment. For most first home buyers, that foundation makes all the difference.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.