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Interest-Only Mortgage Formula:
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An interest-only mortgage is a type of loan where the borrower pays only the interest for a set period, typically 5-10 years, without reducing the principal balance. This results in lower initial payments but requires repayment of the full principal at the end of the term.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The formula calculates only the interest portion of the mortgage payment, which is the annual interest divided by 12 months.
Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for the eventual principal repayment. It's particularly important for investment properties or short-term ownership strategies.
Tips: Enter the principal amount in NZD and the annual interest rate as a percentage. Both values must be positive numbers.
Q1: What are the advantages of interest-only mortgages?
A: Lower initial payments, improved cash flow, potential tax benefits for investment properties, and flexibility for those expecting future income increases.
Q2: What are the risks of interest-only mortgages?
A: No equity buildup during interest-only period, potential for higher payments later, risk of property value decline, and need to refinance or sell at term end.
Q3: How long do interest-only periods typically last?
A: In New Zealand, interest-only periods typically range from 1-5 years, with some lenders offering up to 10 years for investment properties.
Q4: Can I make principal payments during the interest-only period?
A: Most lenders allow additional principal payments, but check your specific loan terms as some may have restrictions or fees.
Q5: Are interest-only mortgages suitable for first-home buyers?
A: Generally not recommended for first-home buyers as they don't build equity during the interest-only period, which can be risky if property values stagnate or decline.