Interest-Only vs Fully Amortizing Mortgage — True Cost Comparison
Interest-only mortgages have lower initial payments but no equity buildup. See the full payment comparison and total interest cost with our calculators.
Interest-Only Mortgage Calculator
Pay only interest during the draw period — no equity buildup
What it measures: Monthly interest-only payment and how much your payment increases when principal repayment begins.
✓ Use when
- Short-term investment property where you plan to sell before repayment begins
- You expect significantly higher income in future years
- HELOC during the draw period
- Cash flow management during a transitional period
✗ Limitations
- Zero equity buildup through payments during IO period
- Payment shock when principal repayment begins
- Higher total interest cost over the life of the loan
Mortgage Calculator
Every payment builds equity from day one
What it measures: Monthly principal and interest payment on a fully amortizing loan.
✓ Use when
- Primary residence where you plan to build equity
- You want a predictable payoff date
- Long-term wealth building through home equity
- Conservative approach to homeownership
✗ Limitations
- Higher monthly payment than an IO loan for the same amount
- Less short-term cash flow flexibility
Key difference
Interest-only loans give you lower payments now but zero equity growth and a payment shock later. Amortizing loans cost more monthly but build equity immediately and are paid off on schedule.
Worked Example
Scenario
$500,000 loan at 6.75%, 10-year IO period on a 30-year term.
IO payment: $2,813/month for 10 years. P&I after reset: $4,216/month (50% jump). Total interest: ~$785,000.
Fully amortizing: $3,243/month for 30 years. Total interest: ~$667,000.
Interpretation
The IO loan saves $430/month initially but costs $118,000 more in total interest and leaves you with the same $500,000 balance after 10 years of payments. The amortizing loan builds $80,000 in equity during that same period.
Bottom line
Interest-only loans are a cash flow tool, not an equity-building tool. Only use them if the monthly savings serve a specific short-term strategy — not as a way to afford a home you cannot otherwise qualify for.