UK Accounting Glossary
An interest-only loan is any loan that is non-amortizing, at least initially, meaning that payments cover only interest, not a principal reduction. The most common type of interest-only loan is an interest-only mortgage. An interest-only loan makes sense for some home buyers, but not others. A good candidate for an interest-only loan is the commission-only salesperson, who can take advantage of smaller payments when necessary yet pay down the loan when commission checks arrive. In contrast, the long-term borrower on a fixed income trying to stretch home purchasing power is a questionable candidate for an interest-only loan, particularly if payments jump before the loan is refinanced. In New York City, it is common for a cooperative building to have a large long-term interest-only loan. This type of interest-only loan is often called a standing mortgage.
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This glossary post was last updated: 9th February 2020.