What is an Interest Only Mortgage?

Buying a home is exciting, whether it is your first or fifth. While purchasing a home can be exciting, it can also be very stressful. One stress you will have to deal with, especially if it is your first home, is figuring out what type of mortgage to get. One of the more common mortgage types is the Interest Only Mortgage.

An Interest Only Home Loan is when the borrower only pays the interest on the loan and does not repay any of the principal. This type of mortgage is popular in Australia, typically used as an investment loan. Interest-only mortgages usually have a lower interest rate than principal and interest loans, making them more affordable for borrowers. However, because the borrower is not repaying any of the principal, the loan balance does not decrease over time, which means that the borrower will ultimately have to refund the entire principal amount of the loan.

Interest Only Mortgage Calculator

There are a lot of different mortgage calculators out there. Still, if you're looking for one that calculates explicitly interest-only payments, then the interest only mortgage calculator is for you. Just enter in the mortgage amount, interest rate,  term of the loan, and the term of interest payments, and it will calculate your monthly interest-only payment.

This can be a helpful tool for budgeting purposes. Additionally, many mortgage calculators will also show the total interest that will be paid over the life of the loan. This calculator can be handy for someone considering an interest only home loan in estimating the total interest that will be paid.

Features and Benefits of Interest Only Mortgage Calculator

Before taking out an interest-only mortgage, use an interest only mortgage loan calculator to determine if this type of loan is right for you. You must consider your current financial situation and long-term goals to make the best decision for your needs.

  • This type of mortgage allows borrowers to make lower monthly payments by only paying the interest on the loan for a set period. 
  • With an interest-only mortgage, you will not be building any equity in your home for the first few years of the loan. If you sell your home or default on loan, you may owe more than the home is worth. 
  • Your monthly payments will increase after the interest-only period ends since you will also be responsible for paying off the loan's principal.

Things you should know About Interest only Mortgage calculator

An interest only mortgage calculator can help you determine whether an interest-only mortgage is suitable for you and, if so, how much you can afford to borrow. There are a few things to keep in mind when using an interest-only mortgage calculator:

  • First, remember that your monthly payments will be lower if you only pay the interest on your loan for the first few years. However, you will ultimately have to pay the full loan amount, plus interest, over the life of the loan.
  • Second, keep in mind that interest rates on interest-only mortgages are typically higher than on traditional mortgages. This means that you will end up paying more interest over the life of the loan.

How is Interest only Mortgage Calculated?

An interest-only mortgage is a home loan in which the borrower only pays the interest on the loan each month. The borrower does not pay any of the loan principal during the term. This mortgage can benefit borrowers who want to keep their monthly payments low or expect their income to increase.

To calculate the monthly payment on an interest-only mortgage, the lender will use the loan amount, the interest rate, and the loan term. The monthly payment will equal the interest rate multiplied by the loan amount divided by 12 (the number of months in a year).

To calculate interest only mortgage, you can use the mathematical  formula outlined below:

PMT = iPV/ 1- (1+i)^-n


  • PMT is referred to as the total monthly payment
  • PV is referred to as the present value of the loan
  • I is referred to as the interest rate
  • N is referred to as the number of loan payments

However, the mortgage rate on an interest-only mortgage becomes adjustable after the initial period expires, which can significantly increase your monthly payments. Because the payment will include the principal that must be repaid over a shorter period than the original loan term, it will also be significantly higher. This can result in sticker shock for homeowners who do not make any principal payments during the initial phase.

Advantages of Interest Only Mortgage Calculator

An interest only mortgage calculator can be a helpful tool when considering an interest only home loan.

  • This type of mortgage can have some advantages over a traditional mortgage, and the calculator can help you determine if it is the right type. 
  • With an interest-only mortgage, you will only be required to pay interest payments for a certain period. 
  • This can lower your monthly payments and give you time to save up for a down payment on the loan's principal. 
  • In addition, an interest-only mortgage can be a good option if you expect your income to increase. 
  • You can make larger monthly payments when your income increases, which will help you pay off the loan more quickly.

Disadvantages of Interest Only Mortgage Calculator

An interest only mortgage calculator can be a great tool to help you calculate your monthly mortgage payments. However, there are some disadvantages to using this type of calculator.

  • First, if you only make interest payments, you will never reduce the principal balance of your loan. If you sell your home or refinance your mortgage, you will still owe the same amount as when you first took out the loan. 
  • Additionally, if market interest rates rise, your monthly payments could increase, making it challenging to keep up with your mortgage payments.

Factors Affecting the Interest Only Mortgage

Many factors can affect the interest only home loan:

  • The most common factor is the change in the prime rate. When the prime rate goes up, the interest rate on the mortgage will also go up. This can cause a problem for people on a fixed income, as their mortgage payments will increase.
  • Another factor that can affect the interest-only mortgage is the change in the housing market. If the housing market goes down, more than the house's value may be needed to cover the mortgage. This could lead to foreclosure.

Frequently Asked Questions

Can you get interest-only mortgages in Australia?

Yes, you can get interest-only mortgages in Australia. Interest-only mortgages are available from several lenders in Australia, and they can be a great way to keep your repayments low.

How much do I pay back on an interest-only mortgage?

If you have an interest-only mortgage, you’ll only be required to pay back the interest that accrues on loan. The principal balance of the loan will remain unchanged.

Is it worth paying interest only?

There is no easy answer to this question. Some people believe that paying interest only is a waste of money, while others believe that it can be a helpful way to manage your finances. Whether or not to pay interest depends on your financial situation.

How long can you pay an Interest Only Mortgage?

Interest Only Mortgages can be paid for a specific period, usually between 5 and 7 years. After this period, the mortgage must be paid off in full.

Why would you have an interest-only home loan?

The length of time you can pay an interest-only mortgage depends on the terms of your mortgage agreement. Typically, you can pay interest only for a set time, after which you must begin paying down the loan’s principal.


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