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Interest Only Payment Formula:
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Interest only loan payment refers to a loan structure where the borrower pays only the interest portion of the loan for a specified period, without reducing the principal balance. This results in lower monthly payments initially.
The calculator uses the interest only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual interest rate to a monthly rate and multiplying it by the principal amount.
Details: Understanding interest-only payments helps borrowers assess affordability during the interest-only period and plan for future principal payments. It's commonly used in certain mortgage products and business loans.
Tips: Enter the principal loan amount in CAD and the annual interest rate as a percentage. All values must be valid (principal > 0, rate ≥ 0).
Q1: What is the main advantage of interest-only loans?
A: Interest-only loans provide lower monthly payments initially, which can help with cash flow management or allow investment of the saved amount elsewhere.
Q2: What happens after the interest-only period ends?
A: After the interest-only period, payments typically increase significantly as you begin paying both principal and interest, or you may need to refinance or pay the balloon payment.
Q3: Are interest-only loans common in Canada?
A: While available, interest-only mortgages are less common in Canada than in some other countries and typically have stricter eligibility requirements.
Q4: Who typically uses interest-only loans?
A: They are often used by investors who plan to sell the property before principal payments begin, or by those expecting significant income increases in the future.
Q5: What are the risks of interest-only loans?
A: The main risk is payment shock when the interest-only period ends, and the potential for negative amortization if property values decline.