What defines an interest-only mortgage?

An interest-only mortgage is characterized by the structure in which the borrower pays only the interest on the loan for a specified initial period, typically allowing for lower monthly payments during that time. After this interest-only period concludes, the borrower must begin repaying the principal, which can result in significantly higher payments once the period ends. This type of mortgage can be advantageous for borrowers who anticipate an increase in their income or who plan to sell or refinance the property before the principal payments begin.

This definition distinguishes an interest-only mortgage from those that require both interest and principal payments from the outset. It is also important to note that although interest-only mortgages can potentially be applied to various property types, including investment properties, they are not exclusively designed for them. Similarly, while fixed-rate mortgages can provide stable payments throughout the loan term, an interest-only mortgage does not necessarily have this fixed rate structure and may involve adjustable rates that can change after the interest-only period.