Initial Interest-Only Period:

• Typically lasts between 5 to 10 years, during which you only pay the interest on the mortgage.
• Your monthly payments are lower because you’re not repaying the loan principal during this time.

Repayment of Principal After Interest-Only Period:

• Once the interest-only period ends, you must start repaying both the principal and interest, which can result in much higher monthly payments.
• Alternatively, some borrowers may choose to repay the entire loan balance by selling the property, using savings, or refinancing the loan.

Advantages:

• Lower initial payments: The interest-only structure results in reduced monthly costs, freeing up cash for other investments or expenses.
• Flexibility: It allows borrowers to potentially invest or save the difference in lower payments elsewhere.

Disadvantages:

• Increased future payments: When the interest-only period ends, monthly payments can spike significantly as you begin to repay the principal.
• No equity buildup: During the interest-only period, you are not reducing the amount owed, which means you aren’t building equity in your property.
• Higher overall cost: In the long run, you may end up paying more in interest because the principal remains unchanged during the interest-only period.

Risks:

• Negative equity: If property values drop and you haven’t paid down any of the loan principal, you may owe more than the property is worth.
• Payment shock: The jump in monthly payments when the interest-only period ends can be difficult to manage for some borrowers.