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Interest Only EMI Formula:
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An interest-only mortgage is a type of loan where the borrower pays only the interest for a set period, typically 5-10 years. The principal amount remains unchanged during this period, and the borrower must repay the full principal at the end of the term or refinance.
The calculator uses the interest-only EMI formula:
Where:
Explanation: The monthly payment covers only the interest on the outstanding principal, calculated by multiplying the principal by the monthly interest rate.
Details: Understanding your monthly interest payments is crucial for budgeting and financial planning. Interest-only mortgages typically have lower initial payments but require a solid repayment strategy for the principal amount.
Tips: Enter the principal amount in GBP and the annual interest rate as a percentage. The calculator will automatically convert to monthly rate and compute your interest-only payment.
Q1: What are the advantages of interest-only mortgages?
A: Lower initial monthly payments, potentially better cash flow, and opportunity to invest the difference elsewhere.
Q2: What are the risks of interest-only mortgages?
A: The principal remains unchanged, requiring a repayment plan at term end. Property value fluctuations could affect refinancing options.
Q3: How is the monthly interest rate calculated from annual rate?
A: Divide the annual percentage rate by 100 to get decimal, then divide by 12 for monthly rate.
Q4: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments, but check your specific mortgage terms for any restrictions or fees.
Q5: What happens at the end of the interest-only period?
A: You must repay the full principal amount, typically through refinancing, selling the property, or using savings/investments.