What is an Interest Only Loan? Understanding Key Features

An interest-only loan is a type of mortgage where the borrower is required to pay only the interest component of the loan for a certain period. During this time, monthly payments are lower because the principal amount is not being reduced.

This type of loan can provide more flexibility for individuals who anticipate an increase in their income, expect a rise in property value, or for those who prefer to allocate funds elsewhere temporarily.

Interest-only mortgages can be particularly appealing to home buyers and investors looking for lower initial payments.

These loans typically come with a set term during which interest is payable, often between 5 to 10 years, followed by a period where both principal and interest must be paid.

Borrowers should be forewarned, though, that after the interest-only period ends, monthly payments will often increase significantly.

Potential borrowers should analyze whether this mortgage option aligns with their financial goals and future income projections. Understanding the implications of these loans, such as potential payment increases and impacts on long-term equity growth, can help make an informed decision.

For further insights on how this impacts housing affordability, check out the impact of interest-only loans on affordability.