Mortgage structure with an initial period of interest-only payments before principal amortization begins or a later balance must be refinanced.
An interest-only mortgage is a mortgage structure in which the borrower pays only interest for an initial period while principal repayment is deferred until later.
Interest-only mortgages matter because they can make housing costs look manageable early on without building much or any equity through required payments. Once the interest-only period ends, the borrower can face a sharp increase in payment or a need to refinance.
During the interest-only phase, the scheduled payment is usually:
Because the required payment covers interest only, the principal balance usually stays unchanged unless the borrower prepays it voluntarily.
| Mortgage type | Early payment pattern | Later consequence |
| — | — | — |
| Interest-only mortgage | Interest paid, principal deferred | Payment shock or refinancing need later |
| Endowment mortgage | Interest paid, policy funded separately | Principal depends on endowment policy proceeds |
| ISA mortgage | Interest paid, ISA funded separately | Principal depends on ISA value at maturity |
| Balloon mortgage | Partial or limited amortization | Large maturity balance |
| Self-amortizing mortgage | Principal and interest paid from the start | Balance steadily falls |
A borrower takes a mortgage with a five-year interest-only phase at a fixed rate. For those first five years, the payment covers interest but does not reduce the principal. When the interest-only phase ends, the borrower must either start paying principal over the remaining term or refinance into a new mortgage.
Some interest-only mortgages later convert into fully amortizing payments. Others still leave a large remaining balance. The interest-only feature describes the payment phase, not the entire maturity outcome by itself.
The borrower may simply be deferring principal repayment. That can leave equity buildup slower and refinancing dependence higher.
Interest-Only Loan: The broader loan-structure concept behind this mortgage form.
Balloon Mortgage: A related mortgage design with a concentrated maturity balance.
Endowment Mortgage: A historical interest-only mortgage variant that relies on an endowment policy to repay principal.
ISA Mortgage: A UK-style interest-only variant that pairs the mortgage with ISA contributions.
Loan-to-Value Ratio: Equity buildup can remain weak if principal does not decline.
Refinancing: Often becomes central when the interest-only phase ends.
Self-Amortizing Mortgage: The contrasting mortgage type that repays principal from the first payment.