See the low payment during an interest-only period, and exactly how much it jumps once principal repayment starts.
Understanding the interest-only loan calculation
An interest-only loan keeps early payments low by not repaying any principal at all. The balance at the end of the interest-only period is identical to the day you borrowed, and the remaining years must then repay the whole thing.
That compression is why the payment jump can be severe — a ten-year interest-only period on a thirty-year loan squeezes full repayment into twenty years.
The default scenario, worked through
On the values this calculator opens with, the interest-only payment is $1,625. Underneath, Payment after IO period comes out at $2,236.72 and Payment jump at +$611.72 per month. Change any field and every figure updates as you type.
Step by step
- Enter the loan amount and interest rate.
- Set the interest-only period and the total term.
- Compare the two payment figures and the jump between them.
The formula
interest-only payment = balance × monthly rate
after the IO period: payment = P × r ÷ (1 − (1+r)⁻ⁿ) over the remaining term
FAQ
Why would anyone choose interest-only?
It suits borrowers expecting income to rise, or investors prioritising cash flow. It carries real risk if the payment jump arrives before the income does.
Do I build any equity during the interest-only period?
None from payments. Only market appreciation changes your equity position.
Can I pay principal voluntarily?
Most interest-only loans allow it, and doing so reduces both the balance and the size of the eventual jump.