1. What is Interest Only Payment?

Interest only payment is a loan repayment method where the borrower pays only the interest charges each month, without reducing the principal balance. This is commonly used in UK mortgages and loans for short-term affordability.

2. How Does the Calculator Work?

The calculator uses the interest only payment formula:

Where:

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

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

3. Importance of Interest Only Payments

Details: Interest only payments provide lower monthly payments initially, making loans more affordable in the short term. However, the principal amount remains unchanged and must be repaid at the end of the loan term.

4. Using the Calculator

Tips: Enter the principal amount in GBP and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between interest only and repayment mortgages?
A: Interest only mortgages require paying only the interest monthly, while repayment mortgages include both interest and principal reduction in each payment.

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 an interest only period?
A: The full principal amount becomes due, requiring either a lump sum payment or refinancing into a repayment mortgage.

Q4: Are interest only payments suitable for everyone?
A: They are best for borrowers with solid repayment plans, investment strategies, or expected future income increases.

Q5: What are the risks of interest only payments?
A: The main risk is being unable to repay the principal at the end of the term, potentially leading to property loss if secured against assets.