Interest-Only Mortgage Trap Calculator

An interest-only mortgage pays the lender the interest each month and nothing else. The balance does not move. The monthly payment is lower than on an equivalent repayment mortgage, and at the end of the term the full original loan is still owed, in one lump. The Consumer Financial Protection Bureau states it plainly: the amount owed does not go down with each payment. This calculator sizes that trade, showing how much more leaves the borrower’s hands across the life of an interest-only mortgage than across a like-for-like repayment mortgage on the same balance, rate and term.

How to use it

Enter the loan amount, the annual rate, and the term in years. Four figures come back alongside the headline gap: the monthly payment under each structure, and the total paid under each, where the interest-only total includes the original balance still owed at the end. Without that last part the comparison would be meaningless, since the whole point of the structure is that the principal survives the term intact. The currency selector changes formatting only. The arithmetic is currency neutral, so the same balance, rate and term produce the same proportional gap in any currency.

Worked example

Take a 200,000 loan at 5% over 25 years, in whatever currency is selected. Interest-only costs 200,000 × 5% ÷ 12 = 833.33 a month, every month, for all 300 months. That comes to 250,000 of interest, and the 200,000 is still outstanding on the last day, so 450,000 leaves the borrower in total.

Repayment on the same terms costs 1,169.18 a month. Across the same 300 payments that totals 350,754.02, and the loan is gone. The gap is 99,245.98. What buys it is 335.85 less to find every month for twenty-five years, which is the appeal and the risk in a single number.

How the math works

Interest-only monthly payment = loan amount × monthly rate, where the monthly rate is the annual rate ÷ 12 ÷ 100. Interest-only total = that payment × number of months, plus the original balance, because the balance is still owed. Repayment monthly uses the standard fixed-rate amortisation formula M = L × r ÷ (1 − (1 + r)⁻ⁿ). Repayment total = monthly payment × months. The trap is the first total minus the second. The formula box below reproduces the same expressions.

When the trap is largest

The gap widens with both rate and term. On the same 200,000 over 25 years, moving the rate from 5% to 7% takes the trap from 99,245.98 to 125,932.48. Holding the rate at 5% and cutting the term from 25 years to 15 pulls it down to 65,314.29. Rate raises the interest paid every month; term multiplies that monthly difference across more months.

Loan size scales it exactly. Every term in the calculation is linear in the balance, so doubling the loan doubles the trap and halving it halves the trap, with rate and term unchanged. That makes the trap as a fraction of the balance the more portable figure: at 5% over 25 years it is just under half the original loan, whatever the loan happens to be.

Where interest-only mortgages are still common

Buy-to-let landlords use interest-only routinely, because the property is intended to be sold or refinanced at the end and the rent is sized against the monthly cost rather than against principal repayment. Bridging loans during a property transition are interest-only by design. Some commercial property loans run interest-only to a balloon payment at maturity.

Owner-occupied residential lending is a different story since the tightening that followed 2008. The Financial Stability Board’s principles for sound residential mortgage underwriting, agreed internationally, place the emphasis on verified repayment capacity rather than on collateral value alone, and national regimes built on that approach generally expect evidence of a credible repayment vehicle before new interest-only lending is written.

What this calculator doesn’t capture

The model assumes a constant rate, equal payments, and both schedules running to the end exactly as written. Real mortgages carry fixed-rate periods that reset, arrangement and product fees, early-repayment charges where the borrower switches structure mid-term, and tax treatments that differ between owner-occupied and investment use, since interest is deductible against rental income in some countries and not in others. What the figures give is the headline difference between two payment structures. A specific product, with its own fees and its own tax position, can move it.