Your interest-only term is ending and the repayment is about to change. What reverting to principal and interest does to your deductible balance, and whether a lender will extend the term.
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Reversion is contractual, not discretionary. Four things move on the same day:
Lenders write to you in the months before the date, though the switch needs nothing from you. Repayments are recalculated to include principal, and the new figure appears on the next direct debit. An instruction is required only to stop it.
Principal that was never repaid during the interest-only period has to be repaid across what remains. A $300,000 split written on a 30-year term with a five-year interest-only period amortises over 25 years. The same split with a 10-year interest-only period amortises over 20. Lenders call this the residual term, and it is why two households with identical balances and rates can face very different repayments.
Interest-only pricing sits above the equivalent principal and interest rate at most lenders, commonly by 0.2 to 0.5 percentage points, because the balance stays higher for longer. Reverting often comes with a small rate reduction. The reduction softens the increase without reversing it, so the new rate on its own understates what the change costs each month.
Interest on borrowed funds used to buy income-producing assets is generally deductible, and the Australian Taxation Office (ATO) tests that by looking at what the money was used for when it was drawn. Repayment type sits outside that test. Moving the split from interest-only to principal and interest does not disturb the deduction. What falls is the interest itself, because the balance behind it is falling.
The repayment increase is the visible part and, for most households, the manageable part. What the principal component does to the balance carrying your deduction takes longer to show up:
Debt recycling works by paying down non-deductible debt and re-borrowing that same amount as deductible debt. A reverting split does the opposite. Every principal repayment reduces the deductible side while the home loan, where interest earns you nothing back, keeps running near its existing balance. The structure is intact and the deduction is safe. The direction has simply reversed.
Principal repaid into a variable split can usually be redrawn, and redrawn funds are generally deductible where they buy income-producing assets. Recycling the principal back into the portfolio each year restores the balance and holds the deduction where it was.
The cost is administration and market risk. Buying at fixed intervals means buying at whatever the market is doing that week, brokerage applies each time, and the balance you are restoring is leverage secured against your home.
Each redraw is a new borrowing tested on its own purpose, not a continuation of the first one. The records the ATO would expect are the loan statement showing the redraw, the transfer to your broker or fund manager and the contract note for the purchase, dated in sequence. Tracing that was straightforward across one drawing becomes a small annual task across many.
Redraw is a product feature, not a given. Some products limit it, some charge for it, and a split that has been fixed usually restricts it for the fixed term. Principal repaid into an account you cannot redraw from is out of reach, so the deductible balance falls permanently and rebuilding it later means a fresh application assessed on your income at that time.
The figures below are illustrative and assume a $300,000 investment split written on a 30-year term at 7.24% p.a. interest-only that reverts to 6.84% p.a. on principal and interest, a home loan at 6.35% p.a. and a 39% marginal rate including the 2% Medicare levy. The pattern matters more than the dollars:
Interest alone on the split costs about $1,810 a month. What replaces it depends on how much term is left.
| Term remaining at reversion | Monthly repayment | Monthly increase | Deductible balance repaid in year one |
|---|---|---|---|
| 25 years | $2,090 | $280, or 15% | About $4,700 |
| 20 years | $2,297 | $487, or 27% | About $7,270 |
| 15 years | $2,670 | $860, or 48% | About $11,880 |
These figures are illustrative only, based on the assumptions stated, and are not a quote, forecast or promise of any result.
Repayments rise on every path even though the rate has fallen. That last row is a common position for anyone who took a 10-year interest-only period on a loan that was already several years old.
Five years of principal and interest on the 25-year path reduces the split from $300,000 to roughly $272,900, so about $27,100 of deductible debt has been repaid. Deductible interest falls from around $20,520 a year to around $18,670, a difference near $1,850. At a 39% marginal rate, that is close to $720 a year of deduction value, and the gap keeps widening for as long as the split amortises.
That same $27,100 could have landed on either loan. Against the home loan at 6.35%, it saves about $1,720 a year of interest that was never deductible, and the whole saving is yours. Against the split at 6.84%, it saves about $1,850 a year of interest that was deductible, worth about $1,130 once the lost deduction is counted.
The gap runs near $590 a year in favour of the home loan on these assumptions, and it holds for as long as non-deductible debt remains. Higher rates widen both sides of it, which is why recycling in a high-rate market rewards attention to where each dollar of principal lands. Your accountant should confirm the marginal rate the comparison turns on before you redirect anything.
Four responses cover most households, and serviceability decides which are available:
An extension keeps the split at its limit, holds the deduction where it is and leaves the monthly commitment near where it has been. It also keeps the balance frozen for longer, so total interest across the life of the loan rises and the eventual reversion lands on a shorter term again. Lenders cap the total interest-only period across the life of a loan, so a second term is often shorter than the first.
Where your current lender has reached its maximum, another may not have. Refinancing also resets the loan term, which lowers the eventual principal and interest repayment by spreading it further.
It is a full application carrying discharge, establishment and valuation costs, and the incoming investment split has to be written as its own account with its balance matched to the old one. Moving lenders for cash flow alone is rarely worth the disruption. Moving because the structure needs it usually is.
Reversion costs nothing to arrange and cannot be declined. Where the household has surplus, it also starts reducing total debt from the first repayment.
The trade is the reversed direction of repayment, and the reduction in your deductible balance is permanent unless you redraw and reinvest. Households close to clearing the home loan often find reversion is the right answer, because that reversal matters less as the non-deductible balance shrinks.
Re-amortising the split over a longer term lowers the principal and interest repayment without another interest-only period. Spread over 30 years instead of 25, the same $300,000 split costs about $1,964 a month at 6.84%, roughly $126 less than the 25-year figure, and the balance starts reducing straight away.
The balance also takes longer to clear and total interest rises. Lenders apply maximum term limits, and older applicants may be asked how the loan will be repaid.
| Response | What it costs | What it achieves | Approval required |
|---|---|---|---|
| Extending interest only | More interest over the life of the loan | Cash flow and the deductible balance | Yes, full assessment |
| Refinancing for a longer term | Application time, discharge and setup fees | Cash flow, the deductible balance and lender choice | Yes, at a new lender |
| Letting the split revert | About $280 a month and a falling deduction | Total debt reduction | No |
| Re-amortising the loan term | More interest across a longer term | Monthly cash flow | Yes, subject to policy |
General guide only. Costs, policy limits and availability differ by lender and product, and change without notice.
The Australian Prudential Regulation Authority (APRA) expects a new serviceability assessment whenever loan conditions change materially, and it names the extension of an interest-only period as one of those changes. Six things decide the outcome:
Lenders assess an interest-only loan on the principal and interest repayment that will apply once the interest-only period ends, calculated across the term remaining at that point. Extending by five years shortens that residual term by five years, which lifts the assessed repayment. An extension is therefore harder to service than the loan you already hold, and it gets harder with each one granted.
Assessment happens at your actual rate plus at least 3 percentage points, a buffer APRA has held since October 2021 and confirmed again in 2026. On a 6.84% rate, that puts the assessed rate near 9.84%, applied to the shortened residual term. The two settings compound, which is why extensions approved without difficulty five years ago can be declined today on the same income.
From 1 February 2026, authorised deposit-taking institutions (ADIs) may write no more than 20% of new mortgage lending at a debt-to-income (DTI) ratio of six times income or higher, measured quarterly and applied separately to owner-occupied and investor lending. It limits the ADI's book, not your application. Debt recycling does not move your DTI either way, since total borrowings are unchanged, though households carrying a large mortgage can already sit near that threshold and may find some lenders more selective.
Maximum interest-only periods commonly run to five years on owner-occupied lending and up to 10 years, occasionally longer, on investment lending. A debt recycling split is investment purpose secured by your own home, and lenders differ on whether the maximum follows the purpose or the security. Confirm which applies at your lender before assuming a second term is available.
A variation can trigger a fresh valuation, and the combined balance of the home loan and every split is measured against it. Interest-only lending is usually restricted at higher loan-to-value ratios (LVRs), so a soft valuation that lifts the LVR above policy can end an extension that serviceability would have supported.
Arrears, missed direct debits and recent hardship arrangements on either loan sit in the assessment and on your credit file. A clean 24 months carries more weight on a variation than on a new application, because the lender is being asked to extend an arrangement it already holds.
Extension requests usually call for the same evidence pack:
General guide only. Document requirements, assessment timeframes and policy limits vary between lenders and are subject to change.
Every decision still available is made before the date:
The date sits in your loan schedule and on your statements, and households running several splits often carry different dates. Write each one against its account number. A split that reverts in the middle of a financial year gets noticed at tax time, months after the extra repayments have already gone out.
Lifting repayments gradually before the switch tests the higher figure against the household budget while the lower one is still contractually due, and Moneysmart's guidance on interest-only home loans is to confirm you can afford the higher figure before the period ends. On the 25-year path, moving in $100 steps across three months reaches the new commitment before the lender does.
Money staged ahead of reversion belongs in an offset account attached to the home loan, where it reduces non-deductible interest and stays available. It should not be paid into the investment split, because withdrawing it later for living costs creates a purpose problem across that whole account. The same reasoning drives the debt recycling versus offset comparison at the start of a strategy, and it does not change halfway through one.
Three professions touch this decision. A mortgage broker confirms what the lender will approve and lodges the variation. A registered tax agent confirms the treatment of any redraw and reviews what falling deductible interest does to your position at tax time. A financial adviser decides whether principal recycled back out belongs in the portfolio at all, given the household's risk position and buffer.
You are not watching a strategy fail. An interest-only term ending is the loan doing what the contract always said it would do, on a date fixed the day the split was written.
The reverted repayment is knowable today. The extension is either available at your lender or it is not, and you can have that answer weeks before anything changes on your account. Households that get caught are the ones who read the letter as a notification instead of a deadline.
Kingfisher Finance Group can model the reverted repayment against your current structure and confirm whether your lender supports an extension before you commit to either path. Our brokers work the numbers alongside your accountant and adviser, and the free estimate shows what the change does to your position.
Book a free call →The loan reverts to principal and interest automatically, and repayments are recalculated across the term remaining instead of the original term. Where you want a different outcome, the request has to be lodged and approved before the date arrives.
No. Deductibility depends on what the borrowed money was used for, tested when it was drawn, and repayment type sits outside that test. Interest you incur on the split remains generally deductible. The amount of interest falls as the balance falls, so the deduction shrinks even though its basis has not changed.
Sometimes. It is a variation to your loan conditions, so the lender reassesses serviceability using the principal and interest repayment over the shortened residual term at your rate plus at least 3 percentage points. Lenders also cap the total interest-only period across the life of a loan, and that cap can differ depending on whether they classify the split by its investment purpose or by the home securing it.
It depends on the balance, the rate and the term remaining. On a $300,000 split reverting at 6.84% p.a., the monthly figure rises by roughly $280 with 25 years left and roughly $860 with 15 years left. Those numbers are illustrative, so ask your lender for the exact reverted repayment, which it can calculate before the date.
Usually on a variable split with redraw available, and the redrawn funds are generally deductible where they buy income-producing assets. Each redraw is a fresh borrowing judged on its own purpose, so the statements, transfers and contract notes need to line up in sequence. Splits without redraw, and splits that have been fixed, may not allow it at all.
While non-deductible home loan debt remains, a dollar generally does more work against the home loan, because the interest it saves there was never deductible in the first place. How much more depends on the two rates and your marginal rate, and your accountant should confirm the position for your circumstances before you redirect anything.
Early enough to lodge, be assessed and, where needed, move lenders. A variation with your current lender can take a few weeks, and a refinance takes longer. Working backwards from the expiry date, three to six months leaves room for a decline and a second option. We generally start with the reverted repayment figure, because it decides whether an extension is worth pursuing at all.
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