Interest-Only Mortgage Calculator
Model an interest-only mortgage: low payments while the IO period runs, plus the higher fully-amortising payment that kicks in when it ends.
Interest-only monthly payment
£1,500.00
- Payment during IO period
- £1,500.00
- Payment once IO period ends
- £2,149.29
- Payment increase at reset
- £649.29
- Payment increase (percent)
- 43.3%
- Total interest during IO years
- £180,000.00
- Total interest during amortising years
- £215,830.36
- Total interest over full term
- £395,830.36
- Principal still owed when IO period ends
- £300,000.00
During the interest-only period, monthly payments cover only accrued interest — the principal balance does not fall. When the IO period ends, the loan re-amortises over the remaining term, producing a higher fully-amortising payment. The full principal is still owed at the reset point, so the "payment jump" is the key risk to plan for.
How to use this calculator
Enter the loan amount, the interest rate (APR), the interest-only period in years (typically 5, 7, or 10), and the total loan term (typically 30). The calculator returns the low monthly payment you make during the IO period, the fully-amortising payment that starts when the IO period ends, the size of the payment jump (in both absolute and percentage terms), and the total interest paid over the full term. Because principal is not repaid during the IO years, the full loan amount is still owed when the amortising period begins — plan for it.
How the calculation works
During the interest-only period the monthly payment is simply the loan balance multiplied by the monthly interest rate: M_io = P × (APR / 12). The principal balance stays flat because none of the payment reduces it. When the IO period ends, the remaining term (usually 20 or 25 years on a 30-year loan) has to fully repay the original principal, so a standard amortisation payment kicks in: M_a = P × r / (1 − (1+r)^−n_a), where r is the monthly rate and n_a is the remaining term in months. That amortising payment is meaningfully higher than the IO payment — often 40–60% higher on a 10-year IO / 30-year total mortgage — because 20 years of principal repayment is compressed into a shorter window. Total interest across the whole loan comes to: (IO monthly × months in IO period) + (amortising monthly × amortising months − principal).
Worked example
A $300,000 loan at 6.00% APR, with a 10-year interest-only period on a 30-year total term. Monthly IO payment = $300,000 × 0.06 / 12 = $1,500. When the IO period ends in year 11, the remaining $300,000 principal has to amortise over 20 years (240 months): monthly rate = 0.005, denominator = 1 − 1.005^−240 = 0.6979, so the new payment = 300,000 × 0.005 / 0.6979 = $2,149.29. That is a $649 monthly jump — a 43% increase overnight. Total interest over the 30 years = $1,500 × 120 (IO) + $2,149.29 × 240 − $300,000 (amortising) = $180,000 + $215,830 = $395,830. Compare that to a straight 30-year amortising loan at the same rate, where total interest is about $347,515 — the IO structure costs roughly $48k more in interest for the privilege of a decade of lower payments.
Frequently asked questions
Why does the payment jump so much when the interest-only period ends?
The full principal still has to be repaid, but the number of years left to repay it has shrunk. On a 10-year IO / 30-year total loan, the original 30-year amortisation window is compressed into 20 years once the IO period ends. Repaying the same principal over fewer years plus paying interest on the still-full balance produces a payment that is typically 40–60% higher than the interest-only payment. Some borrowers plan to refinance or sell before the reset — but that assumes rates will not have risen and the property value will not have fallen, both of which are outside the borrower's control. Underwrite the reset payment, not the introductory one.
Who should use an interest-only mortgage — and who should not?
Interest-only structures make sense for borrowers with lumpy or bonus-heavy income (surgeons, sales professionals with quarterly commission, small-business owners taking distributions rather than steady salary) who genuinely intend to pay down principal in chunks during the IO period. They also work for people with a confirmed plan to sell before the reset — an executive on a five-year assignment, a property investor holding a bridging position. They are dangerous for borrowers stretching to afford a house who need the low IO payment just to qualify. When the IO ends, the payment jump forces a refinance, a sale, or a default — none of which are good positions to be in. The 2007–2008 US mortgage crisis was in large part driven by borrowers who could only afford the IO payment on their subprime loan.
Does an interest-only mortgage cost more or less in total interest than a straight amortising loan?
More — always, at the same rate. During the IO years the principal balance never falls, so every year you are still paying interest on the full original principal. On a straight 30-year amortising loan, the balance falls a little every month from day one, and every dollar of principal repaid stops accruing interest forever. Over the full 30-year term the IO structure typically costs 10–15% more in total interest than the straight amortising equivalent. IO borrowers are effectively renting the money for the first 5–10 years without building any equity — you buy the option of a low payment early with a higher total cost over the life of the loan.
Can I pay principal voluntarily during the interest-only period?
On almost all modern IO mortgages, yes — the "interest-only" label refers to the minimum required payment, not the maximum. Any principal you pay voluntarily during the IO years reduces the balance, which reduces both the interest accrued in the remaining IO months and the size of the amortising payment when the reset arrives. This is the discipline that makes IO mortgages work for the right borrower: use the low required payment as a floor during lean months, but throw bonuses, tax refunds, or asset sales at the principal whenever cash allows. Check the note for a prepayment penalty first — some IO loans, especially non-QM or private-money loans, charge one during the first two or three years.
How is an interest-only mortgage different from a balloon or bullet loan?
An interest-only mortgage typically re-amortises after the IO period ends — the loan converts to a standard amortising payment that fully repays the principal by the end of the original term. A balloon (or bullet) mortgage keeps the low IO-style payment for the entire term and then requires the full principal balance in a single lump-sum payment at maturity. Both are interest-only in the sense that the principal balance stays flat, but a balloon leaves you facing a five- or six-figure lump sum at the end, whereas an IO mortgage smoothes the pay-off into an amortising phase. Balloon loans are common in commercial real estate and short-term bridging finance; residential IO mortgages almost always re-amortise.
Are interest-only mortgages still legal and available after the 2008 crisis?
Yes, but they are much more tightly regulated in most markets. In the US, an interest-only loan cannot be a "Qualified Mortgage" under the CFPB's Ability-to-Repay rule (12 CFR § 1026.43(e)(2)(i)(A)), so lenders retain more legal risk and typically underwrite the borrower against the reset payment, not the introductory one. IO loans are now largely a jumbo or portfolio-lender product for high-earning borrowers with substantial reserves. In the UK, the FCA's Mortgage Market Review (2014) requires lenders to verify a credible repayment strategy for any IO loan — usually investment portfolios, expected inheritance, or planned sale — and residential IO mortgages have shrunk from ~30% of the market pre-2008 to a small niche. The structure is still available, but only to borrowers who can prove they do not need it.