Glossary
Interest-only loan
Also called: IO
An interest-only loan requires payments of interest only for a set period, with no reduction in the amount borrowed. Most short-term private and bridging loans are interest-only, with the principal repaid in full at the end.
An example
A bridging loan requires the borrower to pay interest only, or to capitalise it, until the existing home sells. The full principal is then repaid from the sale proceeds.
Why it matters
Interest-only payments are lower than principal-and-interest payments for the same loan, but the debt does not fall. The borrower must have a clear plan for repaying the full balance at the end of the interest-only period.
Points to check
Check how long the interest-only period lasts and what the repayments will be when it ends, because they increase once principal must be repaid. Ask whether the lender will review the loan at the end of the period or require a refinance. Interest-only loans keep the balance unchanged, so any fall in value reduces your equity directly. Plan how the principal will eventually be repaid, such as from a sale or refinance.
Try it: Repayment calculator