Interest Only Mortgage Loans

The option to pay interest only is for a limited time, such as the first 5 or 10 years. Once this time is complete, the remaining payments will pay both principal and interest for the remainder of the loan.

A principal only loan allows a potential home buyer to afford a larger mortgage, as their initial payments will be less than if they were to pay principal and interest from the outset. This can be useful if the value of the property is expected to increase significantly, thus allowing the home buyer to invest to a greater degree in their property

Such a loan can also carry a level of risk. Consider a situaition where the buyer is unable to meet the increased payments at the point that the principal component must start to be paid, and the value of their home has decreased. This could lead to a financial situation where they can not pay off their mortgage through selling their house and are not eligible for refinancing due to a lack of equity.

During a standard amortized loan, the payments involved have a large interest component initially and a small principal component, and as time goes on, the interest component decreases and the principal component increases. As a result of the lack of principal reduction in an interest only loan, you can expect the total interest payed over the term of the loan to be greater than if a principal component was also being payed.

To get an idea of the difference in payments that may be required for an interest only mortgage verse a principal and interest mortgage, take a look at our interest only mortgage calculator that is able to compare an estimate of these payments.