A 40-Year Interest-Only Investment Loan Next to Your Home Loan: How to Use It to Clear Your Home Sooner
A few weeks ago I looked at 40-year home loans for owner-occupiers. The investor version is more interesting. At least two lenders now offer 40-year investment loans with up to 10 years of interest-only repayments, with no reassessment during that period. On its own, that just means a lower repayment. Paired with a home loan you already have, it can become a deliberate way to pay off your home sooner.
The key question isn't how low the repayment goes. It's where the money you're no longer paying on the investment loan ends up. Below I've run one scenario three ways so you can see the difference.
The scenario
These are illustrative figures for a household that already owns its home and is adding an investment property. Both loans are at 80% LVR, so the home is worth about $750,000 and the investment property about $937,500. Rates are the scenario rates only, not a quote.
Home loan (owner-occupied) | Investment loan | |
Loan amount | $600,000 | $750,000 |
Rate (illustrative) | 6.00% | 6.69% |
Term | 25 years remaining, P&I | 40 years, first 10 interest-only |
Monthly repayment | $3,866 | $4,181 interest-only, then $4,835 P&I |
Rent and costs | $800/week rent ($3,467/month), $450/month running costs |
For comparison, the same $750,000 on a standard 30-year P&I loan at 6.69% would be $4,835 a month.
The interest-only repayment is $653 a month lower than a 30-year P&I repayment. Notice also that after the 10-year interest-only period ends, the loan still has $750,000 owing and 30 years left, so the repayment steps up to exactly what a 30-year P&I loan would have cost from day one.
What the property costs to hold
Rent of $3,467 a month less $450 of running costs leaves $3,017 a month before the loan. On interest-only, the interest is $4,181, so the property runs about $1,165 a month short before tax. On P&I the gap is $1,818 a month, but $653 of that is principal, which is money you keep as equity rather than a cost.
Three ways to run the same loans
A. Standard: both loans on P&I, paying the minimum on each.
B. Interest-only, spend the difference: take the lower $4,181 repayment and let the $653 a month disappear into the household budget.
C. Interest-only, redirect the difference: take the lower repayment, but pay the $653 a month into the home loan. Once the home loan is gone, everything goes to the investment loan.
Plans A and C cost the household exactly the same each month. Only the order changes.
A. Standard P&I | B. IO, spend it | C. IO, redirect it | |
Home loan paid off | 25 years | 25 years | 20 years 2 months |
Investment loan paid off | 30 years | 40 years | 28 years |
Interest on the home loan | $559,743 | $559,743 | $411,384 |
Interest on the investment loan | $990,460 | $1,492,210 | $1,159,465 |
Total interest, both loans | $1,550,202 | $2,051,952 | $1,570,849 |
Household outlay after rent, per month | $5,684 | $5,030 | $5,684 |
Assumes rates and rent stay the same for the life of the loans. Pre-tax. Figures calculated by Finance 365.
What Plan C does
The home loan is gone almost 5 years sooner, with about $148,000 less home loan interest.
All debt is cleared about 2 years sooner than Plan A, for the same monthly outlay.
Total interest is about $21,000 higher than Plan A. That's the cost of leaving the investment balance at $750,000 for 10 years. In exchange, more of the interest you pay sits on the investment debt and less on your home.
At year 10, the total debt under A and C is almost identical, around $1.1 million. The difference is the mix: under Plan C the home loan is about $107,000 lower and the investment loan about $111,000 higher.
Same money, different order. Pay down the debt on your home first, and let the investment debt wait.
Why Plan B is the trap
Plan B feels the most comfortable, saving $653 a month. But it adds about $500,000 of interest over Plan A, and after 30 years there's still about $422,000 owing on the investment loan. For most people that runs well past the age they'd want to stop working.
Want to go faster? Add a little more
If the household can find another $500 a month and also sends it to the home loan, Plan C clears the home in about 16 years and all debt in about 24. The same extra $500 on Plan A clears the home in about 19 and a half years. The interest-only structure gives the extra repayments more room to work on the debt that matters most to your budget.
Other cash you can direct the same way:
Rent increases. Send each rent rise straight to the home loan rather than absorbing it.
Tax refunds, where you're entitled to one. See the tax note below before counting on this.
Pay rises and bonuses. Lift the automatic extra repayment when your income lifts.
Extra repayments can sit in the home loan's redraw or in an offset account. For most people I lean towards redraw, because a little friction makes the money less likely to be spent. An offset works well if you already have strong savings habits. Either way, set the extra repayment up as an automatic transfer on payday.
The tax rules have changed, so check yours
Important for new purchases
For established residential property contracted after 7:30pm AEST on 12 May 2026, rental losses can no longer reduce tax on your salary from 1 July 2027. They're carried forward against future rental income or gains instead. New builds and properties bought before that time are treated differently. The figures above are pre-tax, so for an established property bought now, treat the $1,165 monthly shortfall as real cash you need to fund.
Two points to raise with your accountant before you set this up:
Keep the loans separate. Interest deductibility depends on what the borrowed money was used for. Don't redraw from the home loan to pay investment costs, and don't mix the two loans.
Your own tax position. Whether your property is a new build, grandfathered or caught by the new rules changes the after-tax result.
Risks to weigh first
The strategy only works if the $653 actually goes to the home loan. If it's spent, you're running Plan B.
The repayment rises at year 10. It steps up by $653 a month. Plan C absorbs this because the household is already paying the same total.
Borrowing power doesn't go up. At least one lender offering this product assesses you on a 30-year P&I basis, so the longer term doesn't help you borrow more.
No equity is built on the investment for 10 years. Your position there depends on the property's value.
Interest-only rates are often higher than P&I rates. Compare both properly. Here I've used one rate for both investment options to keep the comparison clean.
Rates and rents will move. The figures assume both stay the same, which they won't.
The bottom line
A 40-year interest-only investment loan isn't cheaper on its own. Its value is the cash flow it frees up. Point that cash at your home loan and you can be free of the debt on your own home years sooner, for roughly the same total interest. Spend it, and it becomes one of the most expensive ways to hold a property.
Thinking about pairing an investment loan with your home loan?
I'll run your own numbers side by side, interest-only against P&I, so you can see when your home loan could be cleared and what it costs to get there.
Sources: The Adviser, 40-year investor loan with 10 years of IO launches (July 2026); Broker Daily, AMP Bank launches 40-year investor loan with 10-year IO (July 2026); money.com.au, 40-Year Mortgages in Australia (October 2026); CGT Australia, Negative Gearing After the 2027 Reform; William Buck, Federal Budget Analysis 2026: Negative gearing; Repayment and interest figures calculated by Finance 365
This article is general information only and does not take into account your objectives, financial situation or needs. Lender policies, tax rules and eligibility criteria change, so confirm the current position before acting. Lending criteria, fees and charges apply.
Ian Freeman, Finance 365. Credit Representative Number 439731 of Australian Credit Licence 384704.