Should Auckland Landlords Switch to Interest-Only During High Interest Rates?
What Is the Difference Between Interest-Only and Principal and Interest?
With a principal and interest (P&I) loan, each repayment covers part of the interest charged and part of the original loan balance. Over time, your mortgage decreases.
With an interest-only loan, you pay only the interest for an agreed period – typically one to five years. Your loan balance does not reduce during this time.
For example, on a $600,000 investment property loan at 5.50% interest:
That difference, over $650 per month in this example, can significantly change the cash flow position of a rental property that is otherwise running at a loss.
Interest-Only vs P&I Repayment Comparison
| Repayment Type | Monthly Repayment (approx.) | Monthly Saving |
|---|---|---|
| Principal and Interest (30 years) | ~$3,407 | – |
| Interest-Only | ~$2,750 | ~$657 |
Why Are Auckland Landlords Considering This Now?
Several factors have increased financial pressure on Auckland property investors in recent years:
- Interest rate rises: fixed rates climbed sharply between 2022 and 2024, with many landlords rolling off 2-3% fixed rates onto rates above 6%
- Interest deductibility restrictions: from October 2021, the ability to claim mortgage interest as a tax deduction was phased down, increasing after-tax costs for many landlords
- Rising insurance and rates: council rates and insurance premiums have increased across Auckland
- Stagnant capital growth: property values in some Auckland areas have been flat or declining, reducing the “growth offsets losses” argument
The good news is that some of these pressures are easing. The Reserve Bank has been cutting the Official Cash Rate (OCR), with rates dropping from 5.50% in 2024 to 3.25% by mid-2025, and further cuts may follow. From 1 April 2025, 100% interest deductibility has been restored, giving landlords full tax relief on mortgage interest again.
Even so, many landlords are still working through the lag, locked into higher fixed rates that will not roll off for months, or managing properties where rent has not kept pace with costs.
When Does Switching to Interest-Only Make Sense?
Interest-only is not inherently good or bad. It is a tool, and like any tool, it works well in specific situations.
Switching to interest-only may be worth considering if:
- Your property is running at a cash flow loss, and the reduced repayment would bring it closer to break-even or positive
- You are approaching a fixed-rate expiry and need breathing room while you restructure your lending
- You have a clear plan to return to P&I once rates stabilise or rental income improves
- You want to redirect cash flow toward paying down non-deductible debt (such as your own home loan) first
- You are holding a property for long-term capital growth and prioritise cash flow flexibility over rapid equity building
When Should You Think Twice?
Interest-only is not a permanent solution. It delays principal repayment, which has real consequences:
- Your loan balance stays the same. After five years of interest-only, you still owe what you started with. If property values drop, your equity position worsens.
- Repayments increase later. When the interest-only period ends, your P&I repayments will be higher because you have less time remaining on the loan to repay the same balance.
- Lender appetite varies. Not all banks approve interest-only for investment properties, especially if your loan-to-value ratio (LVR) is above 80%. You typically need at least 20% equity.
- It can mask an underperforming property. If the only way to keep a property viable is permanent interest-only, the underlying investment may need a broader review.
How Does Interest-Only Affect Tax Deductibility?
From 1 April 2025, landlords can claim 100% of the interest incurred on residential investment property loans. This applies regardless of when the property was purchased or the loan was drawn down.
Whether you are on interest-only or P&I does not change the amount of interest you can deduct. You can only deduct the interest portion of your repayments, not the principal. On an interest-only loan, your entire repayment is interest, which means the full amount is deductible.
This is one reason some investors and their advisers favour interest-only for investment properties: it maximises the deductible portion of your mortgage costs while directing spare cash flow toward non-deductible personal debt.
However, this is a financial strategy that depends on your full situation. Always discuss it with a qualified accountant or financial adviser before making changes.
What Should You Ask Your Mortgage Adviser?
If you are considering switching to interest-only, these are the key questions to work through with your broker or bank:
- What is my current LVR?: Most lenders require at least 20% equity to approve interest-only on an investment property.
- How long can I get interest-only for?: Typical terms are one to five years, but this varies by lender and your financial profile.
- What will my repayments look like when I revert to P&I?: Make sure you understand the increase and can manage it.
- Would extending my loan term achieve a similar result?: Sometimes extending from 25 to 30 years reduces repayments enough without going interest-only.
- Does this fit my broader financial plan?: Interest-only should be a deliberate choice within a wider strategy, not just a short-term fix.
A good mortgage adviser, such as Float Mortgages, can model the numbers across different scenarios and help you understand the trade-offs for your specific situation.
How Does Property Management Fit In?
Switching repayment structures addresses one side of the equation: your mortgage costs. But cash flow also depends on how well your property performs.
Professional property management can directly improve the other side:
- Optimised rental pricing: ensuring your rent reflects current market rates, not a figure set two years ago
- Reduced vacancy: faster tenant placement through professional marketing and screening
- Lower maintenance costs: preventative maintenance planning reduces expensive emergency repairs
- Compliance management: avoiding fines and penalties from Healthy Homes or tenancy law breaches
- Better tenant quality: thorough screening reduces arrears, damage, and early terminations
When a property is well managed, the financial pressure on the mortgage side becomes far easier to navigate.
360 Property Management’s Auckland team can help landlords assess their current situation and develop a practical strategy to improve rental performance.
A Practical Comparison: Interest-Only vs P&I vs Term Extension
Interest-Only vs P&I vs Term Extension Comparison
| Option | Monthly Repayment | Equity Built (Year 1) | Key Trade-Off |
|---|---|---|---|
| P&I – 25-year term | ~$3,685 | ~$11,500 | Highest repayment, fastest equity growth |
| P&I – 30-year term | ~$3,407 | ~$8,100 | Moderate saving, still builds equity |
| Interest-Only | ~$2,750 | $0 | Maximum cash flow relief, no equity growth |
Expert Property Management in Auckland City
If you own a rental property in Auckland City and want to reduce vacancy, protect income, and improve long-term returns, the right management strategy makes all the difference.
Talk to 360 Property Management about a smarter approach to managing vacancy – from the start.
For general inquiries or more information, please email 360pm.nz@raywhite.com. If you are an existing client needing assistance, please submit a request through our Client Portal or call (09) 636 7355.
Frequently Asked Questions
Not automatically. You need to apply to your lender, and approval depends on your equity position, income, and the lender’s current policies. Most banks require at least 20% equity in the property.
Most lenders offer interest-only terms of one to five years for investment properties. After this period, you revert to principal and interest unless you reapply.
It can. Some lenders assess your serviceability based on P&I repayments regardless of your actual structure, so interest-only may not improve your borrowing capacity as much as you expect.
It depends on your goals. Extending your term (e.g., from 25 to 30 years) gives a smaller repayment reduction, but you still build equity. Interest-only gives the largest immediate reduction but no equity growth. Your adviser can model both options for your specific situation.
This is a common strategy: keep the investment property on interest-only (where interest is tax-deductible) and direct spare cash toward your personal home loan (where interest is not deductible). Discuss this with your accountant to confirm it suits your circumstances.
Next Steps for Auckland Landlords
If you are feeling the pressure of higher mortgage repayments on your investment property, the most important step is getting clear on your numbers, both on the lending side and the property performance side.
- Talk to your mortgage adviser about your options: interest-only, term extension, or restructuring your lending
- Review your rental income: is your property performing at market rent, or is there room to improve?
- Audit your costs: are you claiming all the expenses you are entitled to?
- Consider professional management: a well-managed property performs better, reduces vacancy, and protects your asset
360 Property Management helps Auckland landlords and investors optimise rental performance, reduce vacancy, and protect their investment.
Request a free rental appraisal to find out if your property is performing at its best, or speak with our team about how we can help.
