Interest only mortgage
By Jude Wallis
An interest only mortgage charges interest on the full balance and repays no principal during an opening interest only term, so the balance is unchanged when that term ends.
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During the term the payment is the balance times the annual rate, divided by twelve. Nothing else happens: no amortisation, no equity built by paying down debt, and every payment the same size while the rate holds.
The consequence arrives at the end of the term. The original balance now has to be repaid over the years that remain, so the payment recasts to a larger figure than a fully amortising loan of the same size and rate would ever have charged. A borrower who is planning to sell or refinance before that date is making a bet on the date, not on the payment.
Equity can still grow if the property appreciates, which is exactly why the structure attracts people with irregular income or a short holding period. The interest only mortgage calculator shows the payment during the term, how mortgages work is the standard structure, and how amortisation works is what this loan postpones.