1. What is an Interest Only Home Loan?

An interest-only home loan is a type of mortgage where the borrower only pays the interest portion of the loan for a specified period, typically 5-10 years. During this period, the principal balance remains unchanged.

2. How Does the Calculator Work?

The calculator uses the interest-only loan formula:

Where:

• \( P \) — Principal loan amount (currency units)
• \( R \) — Annual interest rate (%)

Explanation: This formula calculates the monthly interest payment by converting the annual interest rate to a monthly rate and applying it to the principal amount.

3. Benefits and Considerations

Benefits: Lower initial payments, improved cash flow during the interest-only period, potential tax benefits (consult a tax professional).
Considerations: Principal balance doesn't decrease during interest-only period, higher payments after interest-only period ends, potential for negative equity if property values decline.

4. Using the Calculator

Tips: Enter the principal loan amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What happens after the interest-only period ends?
A: After the interest-only period, payments will increase significantly as you begin paying both principal and interest, typically over the remaining loan term.

Q2: Are interest-only loans suitable for everyone?
A: Interest-only loans are best for borrowers with irregular income, investors expecting capital growth, or those with short-term cash flow constraints.

Q3: Can I make principal payments during the interest-only period?
A: Most lenders allow additional principal payments during the interest-only period, but check with your specific lender for any restrictions or fees.

Q4: How does this differ from a traditional amortizing loan?
A: In a traditional loan, each payment covers both interest and principal, gradually reducing the loan balance. Interest-only payments cover only interest, leaving the principal unchanged.

Q5: What are the risks of interest-only loans?
A: The main risks include payment shock when the interest-only period ends, potential negative equity, and the possibility of not building home equity during the interest-only period.