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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 set period, without reducing the principal balance. This results in lower initial payments but requires paying the full principal at the end of the term.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The calculation multiplies the principal amount by the monthly interest rate to determine the interest-only payment amount.
Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for the eventual principal repayment.
Tips: Enter the principal amount in NZD and the 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).
Q1: What is an interest-only mortgage period?
A: This is a specified period (typically 5-10 years) during which the borrower pays only interest, after which they must start repaying the principal or refinance.
Q2: Who typically uses interest-only mortgages?
A: Investors and property speculators often use interest-only loans to maximize cash flow and leverage during the investment period.
Q3: What are the risks of interest-only mortgages?
A: The main risk is the "payment shock" when the interest-only period ends and principal repayments begin, which can significantly increase monthly payments.
Q4: 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.
Q5: Are interest-only mortgages available to all borrowers?
A: Lenders typically have stricter criteria for interest-only loans, requiring higher deposits and stronger financial positions from borrowers.