What is characteristic of an Interest-Only (IO) loan?

An Interest-Only (IO) loan is characterized by the fact that the borrower is required to pay only the interest on the loan for a specified period of time, while the principal remains unchanged until the maturity date. This means that during the interest-only period, the borrower does not make any principal repayment, which can lead to lower initial monthly payments. After the interest-only period ends, the loan may require balloon payments or the borrower may start making payments on both principal and interest, depending on the loan's specific terms.

This structure can be attractive for various reasons, such as allowing for greater cash flow flexibility in the early years of the loan, making it a popular choice for investors or those expecting income increases over time. While interest rates can be fixed or variable depending on the loan agreement, the standout feature of an IO loan is the deferred principal repayment, which distinguishes it from standard amortizing loans that require both interest and principal payments throughout the loan term.