How interest-only mortgages work
An interest-only mortgage lets you pay just the interest for an initial period, usually 5 to 10 years. Your monthly payment is lower during that window because no principal is repaid. After the interest-only period ends, the loan converts to a standard amortizing payment for the remaining term.
Use this calculator to compare the interest-only payment with the higher principal-and-interest payment that follows. For a standard fixed-rate loan without an IO period, try the EMI calculator. To see how taxes and insurance change your total housing cost, use the mortgage calculator with taxes and insurance.
Interest-only payment formula
During the interest-only period, the monthly payment is simply the loan balance multiplied by the annual rate, divided by 12:
Where P is the loan amount and r is the annual interest rate as a decimal.
After the IO period
Once the interest-only window closes, the remaining balance is amortized over the rest of the loan term using the standard fixed-rate formula. The principal-and-interest payment is typically much higher than the IO payment because principal must now be repaid in fewer months.
Worked example
On a $200,000 loan at 6.5% with a 5-year interest-only period inside a 30-year total term, the IO payment is $1,083.33 per month. After 60 months, the remaining balance is still $200,000 and the loan amortizes over the final 25 years at a higher principal-and-interest payment.
Frequently asked questions
What is an interest-only mortgage?
Why would someone choose interest-only?
What happens when the IO period ends?
Do interest-only loans cost more overall?
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Resources and references
The formulas and methods in this calculator were checked against these independent sources.