1. What is Interest Only Mortgage?

An interest-only mortgage is a type of loan where the borrower pays only the interest for a certain period, with the principal amount remaining unchanged. This results in lower monthly payments during the interest-only period.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

• \( P \) — Principal amount (GBP)
• \( R \) — Monthly interest rate (decimal)
• \( EMI \) — Monthly interest payment (GBP)

Explanation: The calculation multiplies the principal amount by the monthly interest rate to determine the monthly interest-only payment.

3. Importance of Interest Only Calculation

Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for when principal repayments begin.

4. Using the Calculator

Tips: Enter the principal amount in GBP and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). All values must be valid (principal > 0, rate ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: What is an interest-only mortgage?
A: An interest-only mortgage requires the borrower to pay only the interest on the loan for a set period, after which the principal must be repaid.

Q2: How is the monthly interest rate calculated from annual rate?
A: Divide the annual interest rate by 12. For example, 6% annual rate = 0.06/12 = 0.005 monthly rate.

Q3: What happens after the interest-only period?
A: After the interest-only period ends, borrowers must start repaying the principal, which significantly increases monthly payments.

Q4: Are interest-only mortgages suitable for everyone?
A: Interest-only mortgages are typically suitable for those with investment plans or expected future income to repay the principal.

Q5: What are the risks of interest-only mortgages?
A: The main risk is not having sufficient funds to repay the principal when the interest-only period ends, potentially leading to financial difficulty.