An interest-only period is a stretch at the start of a loan when payments cover interest and nothing else. The balance does not fall. It lowers the payment, raises coverage and frees cash while it lasts, and when it ends the payment steps up to amortise the same principal over fewer remaining years.
- It buys time, not money. The principal it does not repay is still there, and it comes due at maturity in one piece.
- It flatters coverage. A property that clears 1.25 only during the interest-only years has not proved it can carry the loan.
- Use it for a reason with an end date: a renovation, a lease-up, a repositioning. Using it to afford the building is a warning.
- Model the step-up payment, not the current one, when deciding what the property can support.
The same $1,012,000 loan at 6.5%, interest-only against fully amortising over 30 years.
Ten thousand a year of breathing room, and not one dollar of the balance repaid. At the end of it the loan is exactly the size it started.
Related terms
All termsAmortization
Amortization is the schedule by which a loan is repaid through level payments that cover interest first and principal second.
FinanceDSCR (Debt Service Coverage Ratio)
The debt service coverage ratio is net operating income divided by the annual loan payment.
FinanceBalloon Payment
A balloon payment is the unamortised balance that comes due in one sum when a loan reaches the end of its term.
Terms arrive with the writing.
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