Interest-Only Mortgage

An interest-only mortgage is a structure where your repayments during the agreed interest-only period cover only the interest charged on the outstanding balance. The principal, the amount you originally borrowed, does not decrease during this time. Your monthly payments are lower than they would be on a principal and interest structure, but you are not making any progress toward paying off the loan.

Interest-only arrangements are typically agreed for a defined period, commonly one to five years, after which the loan reverts to principal and interest repayments. At that point, the full original balance (assuming no extra repayments were made) must be amortised over whatever term remains. This means repayments can increase meaningfully when the interest-only period ends, sometimes catching borrowers off guard.

The appeal of interest-only is cash flow management in the short term. Investors often use it to preserve cash for other purposes, or to reduce outgoings while a property is being developed or tenanted. For owner-occupiers, interest-only is less common and requires stronger justification to a lender, as it delays the process of building equity.

Interest-only reduces your current monthly repayment, which can improve cash flow in the short term. However, it means no equity is being built through repayments, and when the IO period ends, your repayments will increase, possibly significantly, as the full principal must be paid off over a shorter remaining term. The total interest paid over the life of the loan is also higher on an interest-only structure than on a P&I structure for the same loan amount.

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