Interest-only vs amortising loan
By Jude Wallis
An interest-only payment rents the money: $2,166.67 a month on $400,000 at 6.5 percent, with the balance still $400,000 at the end. An amortising payment on the same loan is $2,528.27 over 30 years, and after ten years of it the balance has fallen to $339,104.51.
| Interest-only | Amortising | |
|---|---|---|
| Monthly payment | $2,166.67. | $2,528.27. |
| Where the payment goes | Entirely to interest. | Interest first, then whatever is left reduces the balance. |
| Balance after 120 payments | Still $400,000. | $339,104.51. |
| Annual cost of the debt | $26,000 a year, every year, unchanging. | Falls each year as the balance falls. |
| What ends the arrangement | A refinance, a sale, or a switch to amortising at a higher payment. | The final scheduled payment. |
| What it assumes | That the balance can be dealt with later, usually by selling or refinancing. | Nothing beyond making the payments. |
On this page
The interest-only payment is a rental price
Multiply $400,000 by 6.5 percent and the annual charge is $26,000, which is $2,166.67 a month. That figure has no principal in it at all, which is why it is easy to compute and why it never falls. Pay it for ten years and you have paid $26,000 a year, ten times over, while owing exactly what you started with.
The amortising payment on the same loan is $2,528.27, or more a month. All of that difference is repayment, and after 120 payments it has taken the balance to $339,104.51. The extra was never a cost; it was a transfer from one pocket to another.
Why the early amortising payment feels like interest anyway
In month one of the amortising loan, interest is the same $2,166.67 the interest-only borrower pays, so only the remainder touches the balance. That is why progress looks slow at the start and accelerates later: each repayment reduces the interest charged next month, which leaves more of the fixed payment to repay principal.
This is also why a ten-year interest-only period is not a ten-year delay. It is a permanent loss of the compounding that repayment produces. How amortisation works shows the split month by month, and the remaining loan balance calculator shows where the balance sits at any point.
Where each structure earns its place
Interest-only suits a borrower who needs the payment low for a defined stretch and has a plan that does not rely on the balance falling: a bridging position, a property held for sale, a business with lumpy income. Amortising suits everyone who wants the debt gone by a date. The risk in the first is concentrated at the end, when the whole principal becomes due at once. The interest-only mortgage calculator and the loan payment calculator price both sides. This is educational material, not financial advice.
Worked examples
Interest only on \$400,000 at 6.5 percent
A $400,000 loan is written interest only at 6.5 percent. What is the monthly payment?
- Annual interest is 400,000 times 6.5 percent, which is $26,000.
- Divide by 12 for the monthly charge: $2,166.67.
The payment is $2,166.67 a month, or $26,000 a year, and the balance stays at $400,000 throughout.
The same loan amortised over 30 years
The same $400,000 at 6.5 percent is amortised over 30 years instead. What is the payment, and where is the balance after ten years?
- The payment that clears $400,000 in 360 months is $2,528.27.
- Walk the schedule forward 120 payments and the balance is $339,104.51.
$2,528.27 a month takes the debt from $400,000 down to $339,104.51 over the same ten years.
Common questions
Is an interest-only rate usually higher?
Often, because the lender's exposure does not fall. Check the rate rather than assuming the payment gap is only structural.
What happens when an interest-only period ends?
The full $400,000 has to be repaid, refinanced, or amortised over the years left, which raises the payment sharply.
Can extra payments be made on an interest-only loan?
Usually yes, and they reduce the balance directly. Check for early repayment charges before relying on it.
Is this financial advice?
No. It is educational material about two repayment structures on the same debt.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.