1. What is an Interest-Only Mortgage?

An interest-only mortgage is a type of loan where the borrower pays only the interest for a set period, typically 5-10 years. During this period, the principal balance remains unchanged, resulting in lower initial payments compared to traditional mortgages.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

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

Explanation: This calculation determines the monthly interest payment only, which does not reduce the principal balance during the interest-only period.

3. Benefits and Risks of Interest-Only Mortgages

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

Risks: No equity buildup during interest-only period, potential for payment shock when principal repayment begins, and risk of negative amortization if property values decline.

4. Using the Calculator

Tips: Enter the principal 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 increase significantly as you begin paying both principal and interest, typically over the remaining loan term.

Q2: Are interest-only mortgages suitable for everyone?
A: No, they are best suited for borrowers with irregular income, those expecting significant future earnings, or investors who plan to sell the property before the interest-only period ends.

Q3: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments during the interest-only period, but check your specific loan terms as some may have prepayment penalties.

Q4: How does an interest-only mortgage affect loan-to-value ratio?
A: Since the principal doesn't decrease during the interest-only period, your loan-to-value ratio remains unchanged unless property values increase or you make additional principal payments.

Q5: Are interest-only mortgages more expensive in the long run?
A: Yes, because you're delaying principal repayment, you'll pay more interest over the life of the loan compared to a traditional amortizing mortgage.