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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 for a certain period, with the principal amount remaining unchanged. Early repayments reduce the principal, which in turn reduces future interest payments.
The calculator uses the interest-only formula:
Where:
Explanation: The calculator first subtracts any early repayment amount from the principal, then calculates the monthly interest payment based on the reduced principal amount.
Details: Calculating the impact of early repayments helps borrowers understand how additional payments can reduce their overall interest burden and shorten the loan term.
Tips: Enter the principal amount in dollars, monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and any early repayment amount. All values must be valid (principal > 0, interest rate between 0-1).
Q1: What is an interest-only mortgage?
A: An interest-only mortgage requires the borrower to pay only the interest portion of the loan for a specified period, after which the principal must be repaid.
Q2: How do early repayments affect interest payments?
A: Early repayments reduce the principal amount, which directly reduces the amount of interest charged in subsequent periods.
Q3: Can I make partial early repayments?
A: Yes, most lenders allow partial early repayments, which will reduce your outstanding principal and future interest payments.
Q4: Are there penalties for early repayment?
A: Some mortgages have prepayment penalties. Check your loan agreement before making early repayments.
Q5: How does this differ from a traditional mortgage?
A: In a traditional mortgage, payments include both principal and interest, gradually reducing the loan balance. Interest-only payments maintain the same principal throughout the interest-only period.