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Interest Only Mortgage Formula:
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An interest-only mortgage is a type of loan where the borrower pays only the interest on the principal balance for a set period, without reducing the principal amount. This results in lower monthly payments initially but requires repayment of the full principal at the end of the term.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual interest rate to a monthly rate and applying it to the principal amount.
Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for the eventual principal repayment. It's crucial for budgeting and assessing affordability.
Tips: Enter the principal loan amount in ₹ or your currency, and the annual interest rate as a percentage (e.g., 5 for 5%). Both values must be positive numbers.
Q1: What are the advantages of interest-only mortgages?
A: Lower initial monthly payments, which can be beneficial for short-term cash flow management or investment purposes.
Q2: What are the risks of interest-only mortgages?
A: The principal amount remains unchanged, and borrowers must repay the full principal at the end of the term, which can be challenging without proper planning.
Q3: How long is the interest-only period typically?
A: Interest-only periods usually last between 5-10 years, after which the loan converts to a principal and interest repayment structure.
Q4: Are interest-only mortgages suitable for everyone?
A: They are best suited for borrowers with irregular income, investment properties, or those who expect significant future income increases.
Q5: What happens at the end of the interest-only period?
A: Borrowers must either repay the principal in full, refinance the loan, or convert to a principal and interest repayment mortgage.