Debt Management and Leverage
Residential property mortgages
Interest only loan
This is a loan where only the interest on the loan is required to be paid. With this loan there is no requirement to repay principal (or capital) during the interest-only period; however, after this period, the interest-only loan reverts to a principal and interest loan.
With this type of structure, the amount of repayment is generally less in dollar terms (as there’s no repayment of principal) however, the interest is continually calculated on the full amount borrowed.
So, over the life of the loan, the total amount of interest paid is larger for this loan structure than for a principal and interest structure.
It is important to note that the amount borrowed is still owed to the lender and would need to be repaid in full at some time in the future.
For example, the capital needs to be repaid if the property is sold.
