1. What is an Interest Only Home Loan?

An interest only home loan is a type of mortgage where for a set period (typically 1-10 years), you only pay the interest portion of the loan, not the principal. This results in lower initial payments but no equity buildup during the interest-only period.

2. How Does the Calculator Work?

The calculator uses the interest-only payment formula:

Where:

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

Explanation: The formula calculates only the interest portion of a loan payment, which remains constant throughout the interest-only period as the principal balance doesn't decrease.

3. Benefits of Interest Only Loans

Details: Interest only loans can provide cash flow advantages for investors, allow for lower initial payments, and may be beneficial for those expecting future income increases or property value appreciation.

4. Using the Calculator

Tips: Enter the principal loan amount and annual interest rate. The calculator will compute your monthly interest-only payment. All values must be valid (principal > 0, rate > 0).

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 riskier than traditional loans?
A: They can be, as you're not building equity during the interest-only period, and payment shock may occur when the period ends and payments increase.

Q3: Who typically uses interest-only home loans?
A: Investors often use them for cash flow management, or homeowners who expect their income to increase or plan to sell the property before the interest-only period ends.

Q4: Can I make principal payments during the interest-only period?
A: This depends on your loan terms. Some loans allow extra principal payments, while others may have restrictions or fees for early principal reduction.

Q5: 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. With interest-only loans, payments cover only interest, leaving the principal unchanged.