Encyclopedia
Interest-only loan
A loan where payments cover only interest for a period.
For example: A buyer uses an interest-only period during renovations. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you buy a building that needs work before it is fully leased. An interest-only loan keeps payments lower during the renovation, so you have more cash for the project. Once the building stabilizes, you move to a regular loan.
What I’d tell a friend
Interest-only payments help cash flow, but you are not paying down the loan. Plan how you will repay or refinance it.
Why it matters to you
The lower payment helps cash flow early on, but none of it pays down the loan. When the term ends you owe the full amount, so if values or rates move the wrong way you can have less equity than you planned when it's time to refinance.
How to use it in your deal
Borrowers should plan how they'll repay or refinance the full balance at maturity, since nothing has been paid down. Check the rate, term, fees, extension options and prepayment terms. Interest-only payments improve cash flow early, but if values fall, you may owe more than the property is worth at refinancing. Lenders may require a lower loan-to-value or guarantees.
Use interest-only when there's a clear plan, like finishing renovations and leasing up. Compare total cost with amortizing loans. Build a timeline with the renovation, leasing and refinancing steps, and add a buffer for delays, since construction and permits often run late. Ask whether the lender will convert the loan to an amortizing term once the property stabilizes, which avoids a second set of fees.
If rates are floating, model what happens if they rise before you refinance. Keep enough cash to cover interest for a few months if the project slips. Lenders like borrowers who show they've thought about the downside.
Mistakes I see
No exit plan. Ignoring refinancing risk. Missing extension terms.
In BC and Vancouver
Loan terms govern; the Bank of Canada publishes rate information.
Official sources: Bank of Canada: key interest rates
What it is
An interest-only loan requires payments of interest only for a period, with no principal paid down.
It is common for construction, bridge and value-add financing.
Watch for
The full balance is still owed at the end. Plan for refinancing or sale, and have a backup plan if values or rates move against you.
Payments rise when principal repayment begins, so check that your income will cover the higher amount.
Questions to ask before you sign
- How long is interest-only?
- What's my exit plan?
- Are extensions available?
- What are the fees?
Keep reading
Related terms: Amortization, Bridge loan
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.