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MasterMath

Interest-Only Loan Calculator

150,000 at 4% interest-only costs 500 a month — and 150,500 in the final month. Over 30 years the interest reaches 180,000, which is 72,196 more than a repayment loan.

Currency and number format for

Monthly interest payment

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Monthly interest payment—
Final payment—
Total interest—
You will repay in total—
How much more than a repayment loan—

How this was worked out

    The formula

    monthly payment = principal × rate ÷ 12 · final payment = interest + the whole principal

    Where it comes from

    An interest-only loan repays nothing until the end. You pay the interest each period and the entire principal falls due in a single final payment, often called a bullet or balloon. The monthly cost is low; the total cost is the highest of any structure.

    How to work it out by hand

    1. Multiply the principal by the annual rate and divide by 12
    2. That same amount is due every month, unchanged
    3. The balance never moves, so the interest never falls
    4. In the final month, add the entire principal to the interest

    What is worth knowing

    The reason this costs so much more is simple: interest is charged on the full amount for the entire term, because nothing is ever repaid. Here that is 180,000 against 107,804 for a repayment loan — 67% more. It makes sense in a few specific cases: bridging finance where the loan is repaid from a sale, corporate bonds, or an investor who genuinely earns more on the capital than the loan costs. It makes no sense at all as a way to afford a house you could not otherwise afford, because the balloon payment does not go away, and the assumption that you can refinance or sell before it lands is exactly the assumption that failed for a great many borrowers in 2008.

    Frequently asked questions

    Why is it so much more expensive?

    Because you never reduce the balance, so you pay interest on the full amount for the whole term. Nothing about the debt improves with time.

    What is the balloon payment?

    The entire principal, due in one lump at the end. On this example that is 150,000 landing in a single month, on top of the interest.

    When does interest-only make sense?

    Bridging finance repaid from a known sale, corporate bond structures, or investment cases where the capital reliably earns more than the loan costs.

    What if I cannot repay the balloon?

    You refinance, sell, or default. Relying on being able to refinance is a bet on future credit conditions, and that bet has gone badly for many borrowers.