1. What is Interest Only Mortgage?

Interest Only Mortgage is a type of loan where the borrower pays only the interest portion of the mortgage payment each month, without reducing the principal balance. This is commonly used for buy-to-let properties where rental income covers the interest payments.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

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

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: Accurate interest-only payment calculation is crucial for buy-to-let investors to ensure rental income covers mortgage costs and to plan cash flow effectively.

4. Using the Calculator

Tips: Enter the principal amount in currency and monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be valid (principal > 0, interest rate between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: What is the advantage of interest-only mortgages?
A: Lower monthly payments initially, which can improve cash flow for investors and make properties more affordable to purchase.

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

Q3: What happens at the end of the interest-only period?
A: The full principal amount becomes due, so borrowers typically need to refinance, sell the property, or have other repayment plans in place.

Q4: Are interest-only mortgages risky?
A: They can be riskier than repayment mortgages as the principal debt doesn't decrease, and property value fluctuations can affect equity position.

Q5: Who typically uses interest-only mortgages?
A: Primarily buy-to-let investors, property developers, and sometimes high-net-worth individuals with sophisticated financial planning.