What this calculator does
An interest-only mortgage pays nothing off the loan during its initial period. The payments are lower, but the debt at the end of that period is exactly what it was at the start, and the payment then jumps to repay the whole balance over a shorter remaining term.
The jump is the part worth planning for. On a $400,000 loan at 6 per cent, a five year interest-only period keeps payments at $2,000.00, then lifts them to $2,577.21, a 28.9 per cent increase. A ten year period pushes that increase to 43.3 per cent.
The formula
The interest-only payment is the loan balance times the monthly rate. Once the period ends, the same balance is amortised over whatever remains of the term, which is what produces the step up.
| Term | Meaning |
|---|---|
| Interest-only period | The initial years during which no principal is repaid. |
| Payment shock | The step up in payment when principal repayments begin. |
| Remaining term | The years left to repay the full balance, which shortens as the interest-only period lengthens. |
The inputs explained
| Field | What to enter |
|---|---|
| Loan amount ($) | The loan amount. |
| Annual interest rate (%) | The annual interest rate. |
| Interest-only period (years) | The interest-only period in years. |
| Total loan term (years) | The total loan term, including the interest-only period. |
When to use it
Planning for the payment increase
The step up is known in advance and is large, so it is worth budgeting for well before it arrives.
Bridging a period of lower income
Interest-only can be a deliberate short-term measure, provided the later payment is affordable.
Understanding an investment loan
Interest-only structures are common for investment property, where the tax treatment of interest differs.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much does the payment jump after each period?
The same loan with three interest-only periods.
| Interest-only period | Interest-only payment | Payment once principal repayments start |
|---|---|---|
| 3 years | $2,000.00 | $2,495.94 |
| 5 years | $2,000.00 | $2,577.21 |
| 10 years | $2,000.00 | $2,865.72 |
Questions
Does an interest-only loan cost more overall?
Yes, substantially. No principal is repaid during the initial period, so interest accrues on the full balance throughout. A five year interest-only period on this loan costs $120,000 in interest without reducing the debt at all.
Why does the later payment rise so much?
Because the full original balance now has to be repaid over a shorter remaining term. The longer the interest-only period, the less time is left, and the higher the eventual payment.
When does interest-only make sense?
Where income is expected to rise, where the asset will be sold before the period ends, or where the interest is deductible against rental income. It is a cash flow tool, not a saving.
Can the interest-only period be extended?
Sometimes, at the lender's discretion and usually subject to a fresh assessment. It should not be assumed, since lending standards change and an extension declined leaves the higher payment due regardless.
For a conventional repayment loan, see the loan payment calculator. For paying a loan down faster, see the biweekly mortgage calculator.