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Interest Only Payment Formula:
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Interest only payment is a loan payment structure where the borrower pays only the interest charges for a specified period, without reducing the principal balance. This results in lower monthly payments during the interest-only period.
The calculator uses the interest only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal amount.
Details: Understanding interest only payments is crucial for borrowers considering interest-only mortgages, loans, or investment strategies. It helps in financial planning and assessing affordability during the interest-only period.
Tips: Enter the principal amount in CAD, annual interest rate in decimal form (e.g., 0.05 for 5%). All values must be valid (principal > 0, annual rate between 0-1).
Q1: What is an interest-only mortgage in Canada?
A: An interest-only mortgage allows borrowers to pay only the interest for a set period (typically 1-5 years), after which payments increase to include principal repayment.
Q2: Who typically uses interest-only payments?
A: Investors, real estate developers, and borrowers seeking lower initial payments often use interest-only structures for cash flow management.
Q3: What are the risks of interest-only payments?
A: The principal balance doesn't decrease during the interest-only period, and payments can increase significantly when principal repayment begins.
Q4: Are interest-only mortgages common in Canada?
A: They are less common than in some other countries and typically have stricter qualification requirements from Canadian lenders.
Q5: How do I convert percentage to decimal?
A: Divide the percentage by 100. For example, 5% becomes 0.05, 3.25% becomes 0.0325.