After the bank said no, a new plan across two states.
What is an interest-only loan?
An interest-only loan lets you pay just the interest for a set time, without paying back the amount borrowed. That amount is called the principal. Payments are lower at first, but the debt stays. They usually rise when this phase ends. You then pay both debt and interest over the years left on the loan.
Updated
What do interest-only repayments pay for?
They cover the lender's charge for the use of its money. None of that required payment goes towards the amount you borrowed. Your debt stays the same in this phase unless you make extra payments that the loan allows.
A lower payment at the start does not show that the whole loan costs less. You owe the debt for longer. The rate and fees can also differ from a loan that repays both the debt and interest from the start.
What happens when the interest-only period ends?
The loan tends to switch to principal and interest payments, which cover the debt as well as its interest. You must repay the original debt over the years still left on the loan. This is why the amount due each month tends to go up.
The lender must agree to extend the interest-only phase or replace the loan through refinancing. It may need to check your finances again. Neither change happens by itself. If the lender approves no change, the current contract sets how you must repay.
Does interest-only borrowing build equity?
The payments due in this phase do not build equity through paying down debt. Equity is the property's value less what you owe. It can change when the value of the property changes, even with no change to the loan balance.
If the property's value drops while the debt stays the same, the equity drops too. You still have to repay the debt. Selling for less than that debt does not make the amount you owe go away.
Illustrative example4 steps
Three interest-only years leave the original debt to repay
- Starting principal: $360,000 with an agreed 28-year loan term.
- For the first 3 years, only interest is paid and no extra repayments are made.
- Debt at the switch: $360,000, because none of those scheduled payments reduced principal.
- Time left: 28 minus 3 = 25 years in which to repay the borrowed amount plus ongoing interest.
For investors
Lower initial payments leave the principal outstanding.
Paying just interest can change the cash needed for a rental, but leaves the debt to pay back later. Rent, ownership costs and later debt payments all affect that budget. The loan's name does not decide whether interest can be claimed for tax. That depends on what you used the borrowed money for. Check which interest you can claim with your accountant.
Common questions
Questions about interest-only loan
Keep learning
Property is a complex world.
Interest-only loan is one piece of it. Lending rules decide how much you can borrow, and how soon you can buy again. Next, read about principal and interest loan, holding costs and equity.
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