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Interest Only Payment Formula:
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An interest-only home loan is a type of mortgage where the borrower only pays the interest portion of the loan for a set period, typically 5-10 years. This results in lower monthly payments initially, but the principal balance remains unchanged during the interest-only period.
The calculator uses the interest-only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal amount.
Details: Understanding interest-only payments helps borrowers plan their finances during the initial period of the loan, assess affordability, and prepare for when principal repayments begin.
Tips: Enter the principal loan amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers.
Q1: What happens after the interest-only period ends?
A: After the interest-only period, payments increase significantly as you start 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, or those expecting significant future income increases. They require careful financial planning.
Q3: What are the risks of interest-only loans?
A: The main risks include payment shock when the interest-only period ends, no equity buildup during the interest-only period, and potential negative equity if property values decline.
Q4: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments during the interest-only period, which can help reduce the loan balance and future payments.
Q5: How does this differ from principal and interest loans?
A: With principal and interest loans, each payment reduces the loan balance. With interest-only loans, payments only cover interest, leaving the principal unchanged during the interest-only period.