1. What is an Interest-Only Home Loan?

An interest-only home loan is a type of mortgage where for a set period (typically 5-10 years), the borrower only pays the interest charges on the loan amount, without reducing the principal balance. This results in lower initial payments compared to principal-and-interest loans.

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: The calculation determines the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal amount.

3. Benefits and Risks of Interest-Only Loans

Benefits: Lower initial payments, improved cash flow, potential tax benefits (in some jurisdictions), and flexibility for investors or those expecting future income increases.

Risks: No equity buildup during interest-only period, potential for payment shock when principal payments begin, and overall higher total interest costs over the life of the loan.

4. Using the Calculator

Tips: Enter the principal loan amount and annual interest rate. The calculator will compute your monthly interest-only payment. Remember that this payment does not reduce your loan balance.

5. Frequently Asked Questions (FAQ)

Q1: How long do interest-only periods typically last?
A: Most interest-only periods range from 5 to 10 years, after which the loan converts to a standard principal-and-interest loan.

Q2: Can I make principal payments during the interest-only period?
A: Yes, most lenders allow additional principal payments during the interest-only period, which can help reduce your overall loan balance.

Q3: Are interest-only loans suitable for first-time homebuyers?
A: Generally not recommended for first-time buyers as they don't build equity during the interest-only period and may face payment increases later.

Q4: What happens when the interest-only period ends?
A: Your payments will increase significantly as you begin paying both principal and interest, typically over the remaining loan term.

Q5: Are there any extra fees with interest-only loans?
A: Some lenders may charge slightly higher interest rates or additional fees for interest-only loans compared to standard loans.