Interest-Only Mortgage Trap Calculator

An interest-only mortgage pays the lender only the interest each month — the principal balance does not reduce. The monthly payment is lower than an equivalent repayment mortgage, but at the end of the term the full original loan amount is still owed. This calculator illustrates the gap: how much more is paid in total over the life of an interest-only mortgage compared with a like-for-like repayment mortgage on the same balance, rate, and term.

How to use it

Enter the loan amount, the annual interest rate, and the term in years. The calculator returns the extra cost of choosing interest-only (the trap), the monthly payment under each option, and the total paid under each option (interest-only includes the original balance still owed at the end). The currency selector at the top of the calculator changes formatting throughout — the math itself is currency-neutral.

Worked example

Picture a 200,000 loan at 5% annual interest over 25 years (currency follows the selector). Interest-only monthly is 200,000 × (5% ÷ 12) = 833.33. Repayment monthly under standard amortisation is 1,169.18. Over the 25-year term, interest-only pays 833.33 × 300 = 250,000 in interest, leaving the original 200,000 still owed — a total cash outlay of 450,000. Repayment pays 1,169.18 × 300 = 350,754.02 total, with the loan cleared at the end. The interest-only trap on these inputs is 450,000 − 350,754.02 = 99,245.98, paid in exchange for ~336 lower monthly payments along the way.

How the math works

Interest-only monthly payment = loan amount × monthly rate (annual rate ÷ 12 ÷ 100). Interest-only total = monthly payment × months + original balance (because the balance is still owed at the end). Repayment monthly uses the standard fixed-rate amortisation formula M = L × r ÷ (1 − (1 + r)⁻ⁿ). Repayment total = monthly × months. Trap cost = interest-only total − repayment total. The formula box below reproduces these expressions.

When the trap is largest

The gap between interest-only and repayment widens with rate and term. Higher rates increase the absolute interest paid each month, and longer terms multiply that month-on-month gap by more months. The trap is also larger in absolute terms on bigger loans (because the same percentage gap applies to a larger principal). Running the calculator at different rate and term combinations is usually clearer than reading any single comparison.

Where interest-only mortgages are still common

Buy-to-let landlords often use interest-only because the property itself is intended to be sold or refinanced at the end of the term, and the rental income is sized against the monthly cost rather than principal repayment. Bridging loans during property transitions are typically interest-only by design. Some commercial property loans run interest-only with a balloon payment at maturity. For owner-occupied residential mortgages, interest-only has become much less common since the post-2008 tightening in many jurisdictions; new lending of this type usually requires evidence of a credible repayment vehicle (investment portfolio, planned property sale, other assets).

What this calculator doesn't capture

The model assumes a constant rate, equal monthly payments, and full performance of either schedule through to the end. Real-world mortgages can include fixed-rate periods that reset, arrangement and product fees, early-repayment charges if the borrower switches schedules mid-term, and tax treatments that differ between owner-occupied and investment use (interest is sometimes tax-deductible against rental income). The figures here are an estimate of the headline cost difference between the two schedules; specific products and tax positions can shift the comparison.