Worst case scenario: Interest only loan and falling property prices
Property prices in Australia tend to rise over time, but they can fall. If you have an interest only loan and prices start to fall, you could end up with negative equity.
Imagine you bought an investment property in 2016. For 3 years you made interest only repayments. You had trouble renting it out, but you were waiting for the property to grow in value.
But the market slowed and your property lost value. Then your loan reverted to principal and interest.
Now your repayments are much higher and your property is worth less. You haven't paid off any of your loan and if you sell you'll still be in debt.
This is the worst outcome of having an interest only loan. Most borrowers won't find themselves in this situation, but it's important to understand the possible risks.