1. What is Interest Only Mortgage?

An interest-only mortgage is a type of loan where the borrower pays only the interest on the principal balance for a set period, without reducing the principal amount. This results in lower monthly payments during the interest-only period.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

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

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

3. Importance of Interest Only Calculation

Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for higher payments when principal repayment begins.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What is the typical interest-only period in Australia?
A: Interest-only periods typically range from 1-5 years, after which the loan reverts to principal and interest payments.

Q2: Are there any risks with interest-only mortgages?
A: Yes, borrowers don't build equity during the interest-only period and may face higher payments later. Property value declines could also create negative equity.

Q3: Who typically uses interest-only mortgages?
A: Investors often use interest-only loans for tax benefits, while some homeowners use them for short-term cash flow management.

Q4: Are interest-only mortgages still available in Australia?
A: Yes, but lending criteria have tightened following regulatory changes. They are more commonly available to investors than owner-occupiers.

Q5: What happens after the interest-only period ends?
A: The loan converts to principal and interest payments, which will be higher than the interest-only payments, or the borrower may need to refinance.