Interest-Only Mortgage Calculator

Calculate interest-only mortgage payments and see the payment shock when the IO period ends. Compare total costs against a standard amortizing mortgage.

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Typically 5-10 years

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Enter your loan details and click Calculate to see your interest-only mortgage payments and payment shock analysis.

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Pro Tip

Consider making at least some principal payments during the IO period to reduce payment shock. Even small extra payments can significantly lower your fully amortized payment.

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How Interest-Only Mortgages Work

An interest-only (IO) mortgage allows borrowers to pay only the interest on the loan for a specified period, typically 5 to 10 years. During this period, the monthly payment is significantly lower because no principal is being repaid. The full loan balance remains unchanged throughout the IO period.

Once the interest-only period expires, the mortgage converts to a fully amortizing loan for the remaining term. This means you now must repay the entire original principal in fewer years, resulting in substantially higher monthly payments - a phenomenon known as payment shock.

For example, on a $500,000 loan at 7% over 30 years with a 10-year IO period, your initial payment would be about $2,917/month (interest only). After year 10, this jumps to approximately $4,327/month for the remaining 20 years - a 48% increase.

These loans are best suited for sophisticated borrowers who have a clear plan for managing the payment increase, whether through expected income growth, planned property sale, or refinancing before the IO period ends.

Interest-Only Formulas

Interest-Only Payment

IO Payment = P × r

Where:

P = Principal loan amount

r = Monthly interest rate (annual rate / 12)

Example

For a $500,000 loan at 7% annual rate:

  • • Monthly rate: 7% / 12 = 0.5833%
  • • IO Payment: $500,000 x 0.005833 = $2,916.67/mo
  • • After 10-year IO period, amortized over 20 years: $3,872.83/mo
  • • Payment shock: +$956.16/mo (32.8% increase)

Frequently Asked Questions

What is an interest-only mortgage?
An interest-only mortgage allows you to pay only the interest portion of the loan for a set period (typically 5-10 years). During this time, your principal balance does not decrease. After the IO period ends, the loan converts to a fully amortizing loan with higher payments that include both principal and interest.
What is payment shock?
Payment shock is the significant increase in monthly payments when the interest-only period ends. Since you must now pay off the entire principal in a shorter remaining term, payments can increase by 50% or more. This calculator shows you exactly how much your payment will jump.
Who should consider an interest-only mortgage?
Interest-only mortgages may suit borrowers with irregular income (commission-based), those confident their income will increase, real estate investors optimizing cash flow, or buyers planning to sell before the IO period ends. They are riskier for borrowers who may not be able to handle the payment increase.
Can I make principal payments during the IO period?
Yes, most interest-only mortgages allow you to make optional principal payments at any time. This can reduce your future payment shock and total interest costs while maintaining the flexibility of lower required payments.
How does total interest compare to a standard mortgage?
Interest-only mortgages typically cost significantly more in total interest because you are not reducing the principal during the IO period. The remaining principal must be paid off in a shorter timeframe, and interest continues to accrue on the full balance throughout the IO period.