Question 1

What is an interest-only mortgage?

Accepted Answer

An interest-only mortgage allows you to pay only the interest portion of your loan for a set period (typically 5-10 years), with no principal payments. After the interest-only period ends, payments increase substantially as you begin paying both principal and interest on the remaining balance over the remaining loan term.

Question 2

How much lower are interest-only payments?

Accepted Answer

Interest-only payments are typically 30-50% lower than traditional mortgage payments during the IO period. For example, on a $500,000 loan at 7%, an interest-only payment is $2,917/month versus $3,327 for a traditional 30-year mortgage. However, after the IO period, payments jump significantly higher to pay off the remaining balance.

Question 3

Who should consider an interest-only mortgage?

Accepted Answer

Interest-only mortgages suit borrowers with irregular income (bonuses, commissions), those expecting significant income growth, real estate investors planning to sell before the IO period ends, or buyers who need maximum cash flow flexibility short-term. They are risky for borrowers who cannot afford the payment increase or lack equity building discipline.

Question 4

What happens after the interest-only period ends?

Accepted Answer

When the interest-only period ends, your payment recalculates to pay off the full principal balance over the remaining loan term. This causes a substantial payment increase. For example, a $500,000 IO loan at 7% with a 10-year IO period sees payments jump from $2,917 to $3,870 (33% increase) when the IO period ends.

Question 5

Can I make principal payments during the interest-only period?

Accepted Answer

Yes, most interest-only mortgages allow voluntary principal payments during the IO period. Making extra principal payments reduces your loan balance, which lowers your required payment when the IO period ends. Some borrowers use IO loans strategically, making lump sum principal payments when cash flow permits.

Question 6

How much more interest do you pay with an interest-only mortgage?

Accepted Answer

Interest-only mortgages typically cost 10-20% more in total interest than traditional mortgages because you pay interest on the full balance longer. On a $500,000 30-year loan at 7% with a 10-year IO period, you pay approximately $697,000 in interest versus $698,000 for a traditional loan. The cost difference increases with longer IO periods.

Question 7

Are interest-only mortgages harder to qualify for?

Accepted Answer

Yes, lenders typically require higher credit scores (700+), larger down payments (20-30%), and lower debt-to-income ratios for interest-only mortgages. Lenders also qualify you based on the fully-amortizing payment (after IO period ends), not the lower IO payment, ensuring you can afford the payment increase.

Question 8

Can interest-only mortgages lead to negative equity?

Accepted Answer

Interest-only mortgages do not build equity through principal payments during the IO period. If property values decline, you could owe more than the home is worth (negative equity). This risk is highest with minimal down payments or in declining markets. Building equity requires property appreciation, voluntary principal payments, or large down payments.

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