Australian property investors approaching a $500,000 purchase in early 2025 confront a lending landscape reshaped by 13 Reserve Bank cash rate increases since May 2022 and a serviceability buffer that the Australian Prudential Regulation Authority has kept at 3 percentage points. At Commonwealth Bank, the nation’s largest home lender, the published gap between a packaged interest-only variable rate and a matched principal-and-interest variable rate for an investment loan at 70 per cent LVR has contracted to 5 basis points—6.49 per cent p.a. versus 6.44 per cent p.a. as at 12 February 2025. Yet the nominal rate masks a serviceability calculus that treats interest-only borrowers as though they must repay principal over a compressed 25‑year term from day one, lifting the assessed monthly repayment by hundreds of dollars. With CoreLogic’s national dwelling index up 8.1 per cent through 2024 and gross rental yields for units sitting at 4.6 per cent in Sydney and 5.2 per cent in Brisbane, the decision between IO and P&I is no longer a simple margin call. It turns on tax position, equity trajectory, and the investor’s ability to clear a higher serviceability hurdle that can throttle borrowing capacity by 15 to 20 per cent on an identical income.
How CBA Assesses Serviceability for an Investor Loan
The 3‑percentage‑point buffer and the P&I test for IO
APRA’s Prudential Practice Guide APG 223 Residential Mortgage Lending, last updated on 1 March 2024, requires all authorised deposit‑taking institutions to apply an interest rate buffer of at least 3 percentage points above the loan product rate, or a floor rate plus that buffer, whichever is higher. For an investor taking a CBA Wealth Package IO loan priced at 6.49 per cent, the assessment rate becomes 9.49 per cent. A comparable P&I loan at 6.44 per cent attracts an assessment rate of 9.44 per cent. The 5‑basis‑point gap in the product rate therefore translates into a negligible difference in the headline assessment rate.
The disparity emerges from the repayment structure APRA mandates for serviceability modelling. Under paragraph 27 of APG 223, interest‑only facilities must be assessed using principal‑and‑interest repayments over the residual term of the loan after the IO period expires. A standard 30‑year loan with a five‑year IO window is therefore tested as a 25‑year P&I loan at 9.49 per cent. On a $500,000 balance, that requires a monthly repayment of $4,292, versus $4,260 for a 30‑year P&I loan assessed at 9.44 per cent. The monthly serviceability burden rises by $32, lifting the gross income required to meet a 30‑per‑cent debt‑service ratio by about $1,280 a year. For a borrower with household income of $150,000, that can reduce maximum borrowing capacity by roughly $35,000.
DTI limits and investor exposure caps
CBA’s credit policy as at January 2025 imposes a debt‑to‑income ratio ceiling of 7.0 for most investment lending where LVR does not exceed 80 per cent. If the LVR breaches 80 per cent, the DTI cap tightens to 6.0. The bank also applies a minimum 10‑per‑cent genuine savings requirement for investors, and rental income is shaded to 80 per cent of the gross figure reported on the rental appraisal. When an investor opts for an IO loan, the lower assessed borrowing capacity can push the DTI ratio closer to the cap on a given income, effectively restricting the number of properties a portfolio can support. A borrower with a $120,000 salary and no other debt who qualifies for a $560,000 P&I loan may see the IO assessment trim the maximum to $510,000, a 9 per cent haircut.
CBA Interest‑Only Investor Pricing
Variable rates and the Wealth Package discount
CBA publishes standard variable rates that are then discounted for borrowers who hold a Wealth Package or equivalent relationship product. Effective 12 February 2025, the undiscounted variable rate for an investment IO loan stands at 6.99 per cent p.a. (comparison rate 7.27 per cent p.a. on a $150,000 secured loan over 25 years). With the Wealth Package, which carries an annual fee of $395 and requires a linked transaction account, the rate drops 50 basis points to 6.49 per cent p.a. (comparison rate 6.70 per cent p.a.). The comparison rate reflects the true cost including the package fee and any other known charges, amortised over the $150,000, 25‑year scenario. Interest is calculated daily and charged monthly in arrears, and the loan reverts to P&I at the end of the elected IO period, typically five years.
Fixed‑rate IO options
CBA offers one‑ to five‑year fixed‑rate terms for investor interest‑only loans. The three‑year fixed IO rate for an investor with an LVR at or below 70 per cent was quoted at 5.89 per cent p.a. as at 12 February 2025 (comparison rate 6.61 per cent p.a. based on the same $150,000 benchmark). Fixed‑rate loans do not qualify for the Wealth Package rate discount, and break costs apply if the borrower exits or refinances before the fixed term ends. On a $500,000 loan, the difference between a five‑year IO variable at 6.49 per cent and a three‑year fixed IO at 5.89 per cent translates to a monthly interest saving of $250 during the fixed period. However, the fixed rate is assessed at the prevailing product rate for serviceability, not the lower fixed rate, so it does not improve borrowing capacity.
CBA Principal‑and‑Interest Investor Pricing
Variable P&I rates
For the same investor Wealth Package, the P&I variable rate is 6.44 per cent p.a. (comparison rate 6.55 per cent p.a.) for LVR ≤70 per cent. The undiscounted SVR for P&I sits at 6.94 per cent p.a. The 5‑basis‑point spread over the IO packaged rate is the narrowest recorded since APRA lifted its 30‑per‑cent interest‑only lending speed limit in January 2019. With average investment loan sizes in the CBA book running at $389,000 according to the bank’s December 2024 half‑year results, the annual interest saving from choosing P&I over IO is $194.50, less than the $395 Wealth Package fee. The negligible saving makes the rate argument alone a poor tiebreaker.
The offset advantage and redraw
CBA’s P&I variable loans come with a 100‑per‑cent offset account, whereas the offset on an IO loan offsets only the interest component, not principal, until the loan rolls to P&I. For an investor who keeps a large transactional balance—say, the $50,000 deposit of a future purchase—the effective interest cost on a P&I loan can drop well below the headline rate. A $50,000 balance in an offset account against a $500,000 P&I loan at 6.44 per cent reduces the effective interest rate to 5.80 per cent on an annual basis. The same balance in an IO offset still leaves the full principal outstanding, so the effective rate on the total debt moves only 0.64 percentage points lower, to 5.85 per cent. The offset benefit therefore slightly favours P&I for cash‑rich investors.
Five‑Year Cost Comparison on a $500,000 Loan
Interest cost differential
Assume a 30‑year loan term with a five‑year IO period. On the IO loan at 6.49 per cent, monthly interest is $2,704.17 for the first five years, yielding a total interest bill of $162,250. On the P&I loan at 6.44 per cent, the monthly repayment (principal + interest) is $3,139.61, of which $2,683.33 is interest in month one. Over 60 months, cumulative interest on the P&I loan is $157,780, principal repaid totals $30,597, and the remaining balance is $469,403. The IO borrower pays $4,470 more in interest over the period but retains $30,597 of cash that can be directed to other investments or expenses.
Fee structures and the true annualised cost
Both structures incur the $395 Wealth Package annual fee, which is capitalised into the comparison rate but is an out‑of‑pocket cost. CBA also charges a monthly loan service fee of $8 (reduced to $0 for Wealth Package holders on the P&I product, but retained at $8 for some older IO products; the current package waives this fee on both). There is no Lenders Mortgage Insurance if LVR stays at 80 per cent or below. Adding the package fee to the interest bill, the five‑year total cost for the IO loan is $164,225; for P&I, it is $159,755 plus the opportunity cost of the principal repayments. At the current CBA Term Deposit rate of 4.25 per cent p.a., the $30,597 of retained cash could earn $6,500 in simple interest over five years, narrowing the net cost differential to near zero—provided the funds are deployed productively.
When Each Structure Best Serves an Investor
Interest‑only: tax efficiency and portfolio expansion
For an investor with a marginal tax rate of 47 per cent (including the Medicare levy), the nominal interest payment is deductible against rental income. The $162,250 paid over five years generates a tax deduction worth $76,257 in reduced tax liability at the top rate. The P&I investor deducts $157,780, generating a $74,156 benefit. The extra $2,101 in deductions barely offsets the higher interest outlay, but the IO investor’s real advantage is the $30,597 of capital conserved. That capital can fund a 12‑per‑cent deposit on a second $255,000 investment property (plus costs), accelerating portfolio growth. The strategy works best while the investor remains on high marginal income, expects capital gains to outpace the amortisation schedule, and can service the loan once it switches to P&I.
Principal and interest: equity build and an exit ramp
A P&I structure automatically builds equity. After five years, the $500,000 loan has been reduced to $469,403, a 6.1 per cent equity gain independent of market movement. The lower balance improves LVR, potentially avoiding LMI on a top‑up or refinance, and strengthens the investor’s borrowing capacity for the next acquisition because CBA’s credit model sees lower outstanding commitments. For an investor targeting a sale in five to seven years, the P&I path reduces the balloon repayment risk. If the property market delivers annual growth of 4 per cent, the $500,000 asset would be worth $608,327 after five years. The P&I investor’s equity would stand at $138,924, versus $108,327 for the IO investor, a difference that can fund the deposit on a higher‑value replacement property.
Actionable Takeaways for Investors
- Run a serviceability model before choosing a structure. Ask your mortgage adviser to calculate your borrowing capacity under CBA’s IO assessment, which uses a P&I repayment over a 25‑year residual term at a 9.49 per cent assessment rate. Expect capacity to be 9 to 12 per cent lower than a comparable P&I application.
- Compare the effective interest cost with an offset account. If you hold $50,000 or more in cash that will sit in a transaction account, the effective rate advantage on P&I can outweigh the IO tax benefit.
- Lock in a fixed-rate IO window only if you are certain about holding the property and not refinancing for three years. The three‑year fixed IO rate of 5.89 per cent saves $3,000 annually on a $500,000 loan, but break costs can erase that saving overnight.
- Factor the $395 Wealth Package fee into every comparison. On a sub‑$300,000 loan, the fee can exceed the rate saving relative to the undiscounted SVR; the package works best for loans above $400,000 or where the offset balance is large enough to neutralise the fee.
- Align the loan term with your planned exit date. If you intend to sell within five years, the equity build from P&I can materially improve your net position and reduce reliance on capital gains alone to generate a deposit for the next asset.