Interest-Only Mortgage Calculator: Payment Shock
Interest-only loans have a low payment first and a much higher one later. Enter the loan, rate, term and number of interest-only years to see both payments and the total interest.
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Formula
- Interest-only payment =
balance x annual rate / 12. - Payment after the interest-only period =
P x r / (1 - (1 + r)^-n)withPthe full balance,r= annual rate / 12 andn= months left. - Total interest = IO payment x IO months + new payment x remaining months - loan amount.
Worked example
300,000 at 6%, 30 years, first 5 interest-only. IO payment: 300,000 x 0.06 / 12 = 1,500.00. Then 300,000 over 300 months: 1,932.90. Total interest is 1,500 x 60 + 1,932.90 x 300 - 300,000 = 369,870.00.
When to use it
Use this page to check you can afford the payment after the interest-only period, not just before. If the rate can change as well, use the adjustable-rate mortgage calculator. To see the full cost of a normal fixed loan, use the mortgage calculator, and to repay the balance sooner, use the extra mortgage payment calculator.
Second example
500,000 at 7% for 30 years with 10 interest-only years: payment 2,916.67, then 500,000 over 240 months at 3,876.49. Total interest is 2,916.67 × 120 + 3,876.49 × 240 - 500,000 = about 780,358.
Common mistakes
- Planning on the low payment and forgetting the jump.
- Assuming the property will rise in value and cover the balance.
- Overlooking balloon payments or refinance conditions at the end of the term.
Assumptions
- One fixed rate for the whole term; payments rounded to cents.
- No fees, taxes or insurance, and no balloon payment.
Frequently asked questions
How is an interest-only payment calculated?
Multiply the balance by the annual rate and divide by 12. For 300,000 at 6% that is 300,000 x 0.06 / 12 = 1,500 a month, and none of it reduces the balance.
Why does the payment jump after the interest-only period?
The whole balance must then be repaid in fewer months. After 5 interest-only years on a 30 year loan, 300,000 is repaid over 25 years at 6%, which costs 1,932.90 a month, 432.90 more.
Is an interest-only loan more expensive?
Usually yes in total interest, because the balance does not fall for years. This example costs 369,870 in interest, against 347,515 for a normal 30 year loan at the same rate.
Does this assume the rate stays fixed?
Yes. If your rate is variable, use the adjustable-rate calculator to see the payment after each rate change. Also check whether your lender requires a refinance or balloon payment at the end.
How much is the interest-only payment on a 500,000 mortgage at 7%?
It is 500,000 × 0.07 ÷ 12 = 2,916.67 a month. If the interest-only period is 10 years of a 30-year loan, the payment then rises to 3,876.49, an increase of 959.82, and total interest is 780,358.
Interest-only vs repayment mortgage: what is the difference in payment?
On 300,000 at 6% over 30 years, a repayment loan costs 1,798.65 a month and an interest-only loan costs 1,500, which is 298.65 less. But the interest-only loan leaves the balance at 300,000, so the payment later has to catch up.
What happens when the interest-only period ends?
The loan usually converts to repayment over the remaining term, so the same balance is repaid in fewer months. With 10 interest-only years on 300,000 at 6%, the payment moves from 1,500 to 2,149.29, and total interest is 395,829.60.