An interest-only mortgage lets you pay only the interest for an initial period, typically five to ten years. The payment is markedly lower, but the balance does not fall at all — and when the interest-only window closes, the full amount must be repaid over a shorter remaining term.
How the two phases differ
During the interest-only phase your payment is simply the balance multiplied by the monthly rate. On $400,000 at 6.5% that is $2,167 a month, and after ten years of paying it you still owe the entire $400,000.
When the phase ends, the loan recasts: the original balance must now amortize over the remaining twenty years rather than thirty. That shorter term is why the jump is so steep — roughly 38% in this example.
Interest-only payment = balance × (annual rate / 12)
What you gain and what you give up
| Interest-only | Standard amortizing | |
|---|---|---|
| Early payment | Lower | Higher |
| Equity from payments | None | Builds from month one |
| Total interest | Higher | Lower |
| Payment stability | Large step increase | Constant |
| Risk if prices fall | High — no equity buffer | Lower |
Where it is genuinely useful
- Income arriving in large irregular amounts — commission, bonuses or business distributions — where you pay lump sums against principal voluntarily.
- Investment property where the tax treatment of interest and the priority of cash flow justify it.
- A documented, near-term increase in income, such as a qualified professional early in practice.
- Bridging a known short period before a planned sale.
It is a poor fit for stretching into a house you cannot otherwise afford. The payment that eventually arrives is higher than a standard loan on the same house would ever have been.
The equity problem
Because payments do not reduce the balance, equity comes only from price appreciation. If prices stall or fall you can find yourself owing more than the property is worth, which blocks both selling and refinancing.
Widespread interest-only lending was a significant contributor to the 2008 housing crisis for exactly this reason. Post-crisis rules tightened qualification considerably, but the structural risk is unchanged.
Paying voluntary principal
Most interest-only loans permit extra principal payments, and the calculator has a field for them. Every dollar paid during the interest-only period reduces both the balance and the eventual recast payment.
Paying the difference between the interest-only and standard payment gives you the flexibility of the lower obligation with roughly the outcome of the standard loan.
Worked example
Using the values pre-loaded in the calculator above:
| Input | Value |
|---|---|
| Loan amount ($) | 400000 |
| Interest rate (%) | 6.5 |
| Interest-only period (yrs) | 10 |
| Total term (yrs) | 30 |
| Voluntary principal during IO period ($/mo) | 0 |
| Output | Value |
|---|---|
| Interest-only payment | $2,166.67 |
| Payment after the IO period | $2,982.29 |
| Payment increase | +$815.63 |
| Increase as a percentage | 37.6% |
| Balance when IO ends | $400,000.00 |
| Principal repaid during IO | $0.00 |
| Interest during IO period | $260,000.00 |
| Interest after IO period | $315,750.21 |
Frequently asked questions
What happens when the interest-only period ends?
The loan recasts and begins amortizing. The full original balance must be repaid over the remaining term, which typically raises the payment by 30–50%.
Do I build any equity with an interest-only mortgage?
Not from your payments. Equity comes only from property appreciation or voluntary principal payments.
Is an interest-only mortgage cheaper overall?
No. You pay interest on the full balance for longer, so total interest is always higher than an equivalent amortizing loan. What you gain is lower payments early on.
Can I make principal payments during the interest-only period?
Almost always yes, and it is usually wise. Check for prepayment penalties, then use the extra-payment field above to see the effect.
Who qualifies for an interest-only mortgage?
Requirements are stricter than for standard loans — typically strong credit, a larger down payment, substantial reserves, and qualification based on the higher recast payment rather than the interest-only one.