An interest-only (IO) loan requires you to pay only the interest on the outstanding balance during the IO period — no principal reduction occurs. Once the IO period ends, the loan re-amortizes over the remaining term, and your payment jumps to cover both interest and principal on the full original balance.
The calculator is pre-filled with Fixture F from the engine's verified test suite: a $400,000 loan at 5%, interest-only for 120 months (10 years), then fully amortizing for 240 months (20 years). The IO monthly payment is $1,666.67; the amortizing payment after month 120 is $2,639.82 — a jump of $973.15/month on the same balance you started with.
What happens during and after the interest-only period
During the IO window, your entire payment goes to interest. On the pre-filled example: $400,000 × (5% ÷ 12) = $1,666.67/month. Your balance after 120 months is still $400,000 — exactly what it was on day one. You have paid $200,000 in interest and own not one dollar more of the home than you did at the start.
After month 120, the loan re-amortizes. The $400,000 balance must now be repaid over the remaining 240 months at 5%. The payment formula gives $2,639.82/month — a $973 increase. This is the "payment shock" that catches IO borrowers off guard when they did not model it in advance.
Total interest paid over the full 30-year life of this loan is $433,557.51 (Fixture F, engine-verified). By comparison, a standard 30-year amortizing loan on $400,000 at 5% would cost $373,023 in total interest — the IO structure adds $60,534 in extra interest cost due to the 10 years of no principal reduction.
When interest-only loans are appropriate
IO loans have legitimate uses: property developers who need lower carrying costs during construction, investors managing short-term rental properties with a planned sale before the IO period ends, or high-income borrowers who prefer to deploy capital at higher returns elsewhere during the IO window and have high certainty of income continuity.
They are poorly suited for: primary residences where the owner plans to stay long-term (no equity building means no buffer against falling prices), borrowers who cannot confidently afford the higher post-IO payment, and situations where the exit strategy (sale, refinance) is uncertain.
Cross-link: IO is also a mode on the mortgage-payment calculator for modeling IO mortgage products specifically. This generic IO calculator works for any loan type.
IO vs standard amortization: the equity cost
A standard 30-year $400,000 / 5% mortgage builds equity from month one. By month 120, the balance is approximately $340,000 — meaning you have built $60,000 in equity through principal repayment. An IO loan on the same terms at month 120 has a balance of $400,000: zero equity built.
In a rising market, both structures benefit from appreciation. But the IO borrower has no principal-paydown buffer if the property value falls. A 15% price drop on a $500,000 property takes it to $425,000 — the standard amortizer at month 120 has $85,000 of equity buffer ($425k value - $340k balance); the IO borrower at month 120 has $25,000 ($425k - $400k).
This concentration of risk is why IO mortgages — common before 2008 — are now largely limited to professional investors and jumbo borrowers with substantial assets.
Frequently asked questions
What is an interest-only mortgage?
An interest-only mortgage requires you to pay only the interest portion of your loan during the IO period, with no principal repayment. Your balance stays the same throughout the IO window. At the end of the IO period — typically 5–10 years — the loan converts to a fully amortizing schedule for the remaining term, and your payment increases to cover both interest and principal.
How much does the payment increase after the interest-only period?
On the engine-verified example (Fixture F): $400,000 at 5% — IO payment is $1,666.67/month for 120 months, then the amortizing payment jumps to $2,639.82/month — a $973.15 increase (about 58% higher). The jump size depends on the loan balance, rate, and remaining amortization period. Use the calculator with your actual numbers to see your specific payment shock.
Do interest-only loans build equity?
No — not through principal repayment. An IO loan builds zero equity during the IO period through payments. You may gain equity if the property's market value rises (appreciation), but you do not build it by paying down the balance. Once the IO period ends and principal repayment begins, equity building starts on the remaining term.
Is an interest-only loan more expensive overall?
Yes. On the pre-filled example, total interest over 30 years is $433,557.51 vs $373,023 for a standard 30-year amortizing loan on the same $400,000 / 5% — an extra $60,534 in interest. The IO structure costs more because principal reduction is deferred, so you pay interest on the full balance for longer.
Worked examples
5-year IO period then 25-year amortization — standard IO mortgage
$300,000 at 6%: 5-year interest-only period (60 months) followed by 25-year amortizing period. Compares total interest to a standard 30-year amortizing loan.
IO monthly payment
$1500.00
Amortizing payment (post-IO)
$1932.90
IO phase interest
$90,000
Grand total interest
$369,871
IO phase (60 months): payment = $1,500/month, interest = $90,000, zero principal reduction. Amortizing phase (300 months): new payment = $1,932.90/month. Grand total interest: $90,000 + $279,870 = $369,870. Compare to a standard 30-year at 6%: $1,798.65/month, $347,515 total interest. The IO structure costs $22,355 more in total interest despite the same rate and term — because no principal is repaid during the IO window, all 300 amortizing months start from the full $300,000 balance.
10-year IO — development/investment property bridge
$500,000 at 5.5%: 10-year IO window (120 months) followed by 20-year amortization. Models an investor holding an income-producing property during development before planning a sale or refinance.
IO monthly payment
$2291.67
Amortizing payment (post-IO)
$3439.44
IO phase interest
$275,000
Grand total interest
$600,465
IO phase (120 months): $2,291.67/month, $274,999 total interest. Amortizing phase (240 months): $3,451.96/month on the full $500,000 balance. Grand total interest: $274,999 + $328,470 = $603,469. A standard 30-year at 5.5% on $500,000 would cost $284,295 total interest. The IO structure costs $319,174 more — the cost of deferring all principal reduction for 10 years.
3-year IO — short bridge with lower initial payment
$200,000 at 7%: 3-year IO (36 months) then 27-year amortization. Used by a borrower who expects income to rise significantly after 3 years.
IO monthly payment
$1166.67
Amortizing payment (post-IO)
$1375.63
IO phase interest
$42,000
Grand total interest
$287,704
IO payment: $1,166.67/month for 36 months. Amortizing payment: $1,369.28/month for 324 months. The "payment shock" at the IO-to-amortizing transition is $202.61/month — smaller than on longer IO windows because less time was deferred. Total interest: $42,000 (IO) + $243,249 (amort) = $285,249. The same loan on a full 30-year schedule: $1,330.60/month, $279,017 total interest. The 3-year IO adds only $6,232 in extra interest versus the full 30-year — the IO advantage (low initial payment) comes cheapest on short IO windows.
What affects your loan outcome
Length of IO period
A longer IO period means more months of full-balance interest with no principal reduction, and it compresses the amortizing phase into fewer months — driving the post-IO payment higher. A 10-year IO on a 30-year loan leaves only 20 years to amortize the full balance; a 5-year IO leaves 25 years. Every extra year of IO increases total interest paid and increases the payment shock at the transition.
Payment shock at IO expiry
When the IO period ends, the required payment jumps from the IO amount to the fully amortizing amount on the same loan balance — because the balance has not decreased. On a 10-year IO followed by 20-year amortization at 6%, the payment at month 121 is 30–40% higher than the IO payment. Borrowers must plan for this increase — either through expected income growth, a planned sale or refinance, or a financial buffer.
Purpose and exit strategy
IO loans make mathematical sense only when the borrower has a credible exit strategy: planned property sale before or shortly after IO expiry, a refinance into a fully amortizing loan at maturity, or documented income growth that makes the higher amortizing payment manageable. Using an IO loan purely to afford a home at current income levels — without a credible payment-shock plan — is a significant financial risk.
More loan questions
What is an interest-only mortgage and how does it work?
An interest-only mortgage has two phases. During the IO period (typically 5–10 years), you pay only the interest on the full loan balance each month — no principal is repaid and the balance does not decrease. After the IO period expires, the loan re-amortizes: the same balance is now repaid over the remaining shorter term, producing a higher required monthly payment. The total interest paid over the loan life is always higher than on a standard amortizing loan with the same rate and term, because interest accrues on the full balance throughout the IO period.
Is an interest-only loan a good idea?
For investors with a clear strategy (positive cash flow property, planned sale before IO expiry, defined refinance timeline), IO financing can make sense because the lower IO payment preserves cash for other investments or improvements. For owner-occupiers using IO purely to afford a home they could not otherwise finance, it carries material risks: zero equity building during the IO period, a payment shock at transition, and vulnerability to being underwater if property values fall. The lower initial payment is a deferral, not a discount.
What happens when my interest-only period ends?
At IO expiry, your mortgage automatically re-amortizes. The remaining balance (still the full original loan amount if you made only IO payments) is now scheduled to be repaid over the remaining loan term. Because the amortizing term is now shorter than the original full term, the required monthly payment is higher than it would have been on a standard loan. The exact new payment is shown in the calculator above for any IO period length you enter.
What this calculator computes — and what it does not
This calculator models fixed-rate, fully amortizing loans using the standard amortization formula. A number of real-world factors are outside its scope.
- 1.Results are estimates, not guarantees. Actual loan costs depend on the exact terms in your loan agreement, any fees charged at origination, how the lender applies payments, and whether you make every payment exactly on schedule. This calculator assumes all payments are made on time with no changes.
- 2.Interest rates are user-supplied, not live market data. This tool does not connect to any rate feed. The rate you enter should come from a lender quote or your loan agreement. Current rates vary by lender, credit score, loan type, and market conditions — this calculator cannot provide those figures.
- 3.Property taxes, insurance, and PMI are excluded unless toggled on. The payment computed here is principal and interest only. For a mortgage, your total monthly obligation includes property taxes, homeowners insurance, and PMI (if your down payment is under 20%) — collected in escrow by most lenders. These can add $200–$800 or more per month to the P&I payment shown.
- 4.APR vs. interest rate. This calculator uses the stated interest rate for payment math. APR (Annual Percentage Rate) is always higher than the interest rate because it spreads lender fees over the loan term. APR is the correct metric for comparing loan costs across lenders; the stated rate is the correct input for computing the payment schedule.
- 5.Variable-rate loans cannot be accurately projected. This calculator models fixed-rate amortization only. For adjustable-rate mortgages (ARMs), tracker mortgages, or variable-rate personal loans, the payment changes when the rate resets — the full-term projection would require assumptions about future rates that cannot be known in advance.
This calculator is for educational and planning purposes only. It does not constitute financial, mortgage, or legal advice.