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Interest Only Payment Formula:
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An interest-only home loan is a type of mortgage where the borrower only pays the interest portion of the loan for a set period, typically 5-10 years. This results in lower monthly payments initially, but the principal amount remains unchanged during the interest-only period.
The calculator uses the interest-only payment formula:
Where:
Explanation: The calculation multiplies the principal amount by the monthly interest rate to determine the interest-only payment amount.
Details: Understanding interest-only payments helps borrowers budget for the initial period of their loan and make informed decisions about their mortgage options and financial planning.
Tips: Enter the principal amount in AUD and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be valid (principal > 0, rate between 0-1).
Q1: What is the advantage of an interest-only loan?
A: Lower initial monthly payments, which can help with cash flow management, particularly for investors or those with variable income.
Q2: What happens after the interest-only period ends?
A: Payments increase significantly as you start paying both principal and interest, or you may need to refinance the loan.
Q3: Are interest-only loans suitable for everyone?
A: They are typically more suitable for property investors rather than owner-occupiers, as they don't build equity in the property during the interest-only period.
Q4: How do I convert annual interest rate to monthly?
A: Divide the annual rate by 12. For example, 6% annual rate = 0.06/12 = 0.005 monthly rate.
Q5: What are the risks of interest-only loans?
A: The main risk is payment shock when the interest-only period ends, and you may not build equity in your property during this period.