You're miss understanding how interest only works, it's not like your image.
In most cases, people have a 30 year loan which is interest only for the first 5 years. Let's assume you don't do anything to the loan after the I/O period and it simply reverts to P&I.
First 5 years: You pay the interest calculated on the loan on a monthly basis. If you have money in an offset account, the loan amount on which the interest is calcualted is the amount owing minus the offset account.
Interest = (Loan owing - Offset balance) x Interest rate% / 12
After the I/O period ends, the loan becomes P&I amortizing over to remaining 25 year loan term. The minimum contracted repayment is based on the original loan limit, amortizing over 25 years and based on the current interest rate. Given that you haven't paid off any of the principal at this point, you'll still need to make interest payments as part of the P&I repayment every cycle.
Keep in mind that P&I repayments are a contracted minimum repayment amount. You can pay more, but you can't pay less than this amount, even if you're ahead on the loan (there are exceptions, but let's ignore them).
The minimum repayment of a P&I loan is made up of:
* A principal component (which reduces the amount owing over time)
* An interest component (which is calculated based on the formula for interest only repayments above).
--- That's why it's called Principal AND Interest.
If you've got money in the offset account, or you've made extra repayments, the minimum repayment still stays the same. These extra contributions simply reduce the amount of interest paid, but the principal component is increased, which effectively pays off the loan faster.