1. What is Interest Only Loan?

An interest-only loan is a type of loan where the borrower pays only the interest for a certain period, with the principal amount remaining unchanged. This is common in Australian mortgage and investment loan markets.

2. How Does the Calculator Work?

The calculator uses the interest-only formula:

Where:

• \( P \) — Principal loan amount (AUD)
• \( R \) — Monthly interest rate (decimal)
• \( EMI \) — Monthly interest-only payment (AUD)

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

3. Importance of Interest Only Calculation

Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period, which typically lasts 1-5 years in Australian loans before reverting to principal and interest payments.

4. Using the Calculator

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).

5. Frequently Asked Questions (FAQ)

Q1: What is the advantage of an interest-only loan?
A: Lower initial payments, which can improve cash flow for investors or those expecting future income increases.

Q2: How do I convert annual rate to monthly?
A: Divide the annual interest rate by 12. For example, 6% annual = 0.06/12 = 0.005 monthly.

Q3: Are there risks with interest-only loans?
A: Yes, the principal isn't reduced during the interest-only period, and payments will increase significantly when the loan reverts to principal and interest.

Q4: Are interest-only loans common in Australia?
A: Yes, they are particularly popular with property investors seeking to maximize tax deductions and manage cash flow.

Q5: Can I make principal payments during interest-only period?
A: Most Australian lenders allow extra principal payments, but check your specific loan terms as fees may apply.