A loan, or a stretch of a loan's term, in which payments cover interest alone and the principal balance does not go down.
On interest-only terms the payment is the balance times the rate, with nothing going to principal. On $1,000,000 at 6 percent that is $5,000 a month, against about $6,443 on a 25-year amortizing schedule. The whole $1,000,000 is still owed at the end.
Lenders use interest-only periods where a property cannot yet carry principal: during construction, and while a building leases up or is renovated. Some permanent loans also start with an interest-only stretch.
The OCC’s handbook for examiners sets out how banks are expected to treat it. Interest-only tenors are typically shorter than amortizing loans, usually three to five years at most. Even when the loan allows interest-only payments, the property should meet the bank’s coverage requirement as though the loan were amortizing, and loan-to-value and coverage standards are generally more conservative for interest-only loans. The handbook’s own mitigant is a smaller loan: in its example, $899,000 in place of $1,000,000.
So expect a lender to quote coverage on an amortizing payment even if you will pay interest only.
How it shows up in the data here
Partly public. HMDA rows flag interest-only payments, but that flag is not shown on this site, and call reports and credit union filings carry no payment terms. What you can see here is who made loans like yours: loan comps lists lenders by loans made with the median reported rate and term. Compare an interest-only payment with an amortizing one in the amortization and balloon calculator.
Go further
- Amortization and balloon calculator: Payment, balance over time and the balloon due at maturity.
- Loan comps: Who made loans like yours, with the median reported rate and term.
- Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
- DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
- Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.
Related terms
- Amortization: The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
- Balloon payment: The lump sum of remaining principal due at the end of a loan's term when the regular payments did not pay the loan off in full.
- Construction loan: A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
- Bridge loan: A short-term loan that carries a newly built or newly bought commercial property until it is leased and earning enough to be sold or refinanced with a permanent loan.
- Debt service coverage ratio (DSCR): Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
- Lease-up: The period after a building is finished or renovated while it fills with tenants and its income climbs toward a stable level.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.