Interest Only Mortgage Calculator NZ

The Interest Only Mortgage Calculator

The Interest Only Mortgage Calculator

What is an interest only mortgage?

What is an interest only mortgage?

An interest only mortgage is a temporary loan structure where you don't pay any of the principal of the mortgage back. This means that you only pay the interest on the loan for this period.

Interest only loans are used by homeowners and investors to temporarily decrease the size of their mortgage repayments to save on costs.

Over their lifetime, however, interest only loans are more expensive than principal and interest loans (P+I). That's because every payment you make on a P+I loan decreases the principal left on loan. This means that the next payment covers more pdf the principal and less of the interest. This is not the case for interest only loans.

How much lower will my repayments be on an interest-only mortgage?

The amount you can temporarily save using an interest only mortgage depends on the interest rate.

To give an example, let's say you take out a $500,000 loan. The interest rate on this loans is set at 4%, over a 30 year term.

If this was a standard principal and interest mortgage, then the weekly repayment would be $550.50.

However, if the loan was initially put on an interest only mortgage, the weekly repayment would be $384.62, saving $143.12 per week.

Using the Interest Only Mortgage Calculator to Calculate Different Mortgage Scenarios

Over the life of the 5 year interest only period, you would save $43,129.74 compared to if you had used a principal and interest mortgage.

However, the overall cost of an interest only mortgage will be higher than a principal and interest loan because you have faced higher interest costs.

Using the figures above, of a $500,000 loan taken out on a 30 year term at 4% interest:

  • A principal and interest loan will face interest costs of $358,778.44,
  • A 5 year interest only mortgage that turns into a 25 year principal and interest mortgage will face interest costs of $391,165.39 ($32,386.95 more than a principal and interest loan), and
  • A 10 year interest only mortgage that turns into a 20 year principal and interest mortgage will face interest costs of $426,568.84 ($67,790.40 more than a principal and interest loan)
Why Use An Interest Only Loan

You Don't Have to Pay Down Debt to Get Ahead

One of the biggest misconceptions first-time property investors tend to have is that you need to pay off your investment mortgage to get ahead and build wealth.

However, when you run the numbers, long term capital growth creates more wealth than paying down debt.

Take the example of a $500,000 property, financing at 100% on a 30-year principal and interest table loan.

It will take the full 30 years to pay off the $500,000 principal, and based on my standard cash flow model; it would cost you $84,409.97 worth of mortgage top-ups to hold that property.

However, that same property would create the same $500,000 worth of equity through capital growth within the first 15 years of ownership, based on a 5% capital growth rate.

While you can no-doubt pay off your mortgage and achieve capital growth at the same time, this indicates that real wealth is created by holding assets that increase in value over time.

This is the reason why many property investors use interest-only loans: because they require smaller payments, investors can typically buy more property using this type of loan than the alternative principal-and-interest.

Let's take an example to illustrate the point:

The weekly payments on a $500,000 mortgage at 3.75% over 30 years are $534 a week. That's $173.42 more than an interest-only loan, which would be just over $360 a week.

That additional servicing power can be used to buy more property and get more capital gain.

Say you bought the above $500,000 property with 100% lending and rent it for $500 a week. By my forecasts, this property would be negatively geared by $229 a week in the first year on the principal and interest mortgage.

If the same property used an interest-only loan, it would be negatively geared by $56 per week in the first year.

  • For the same level of input per week, you could buy three more properties using interest-only and achieve capital growth on all four of them.
  • Scenario #1 – You have one property that you are paying principal and interest on, and contributing $229 per week to
  • Scenario #2 – You have three houses that you are paying interest-only on, and topping up by $168 a week in total.
  • In scenario #2 you would have three properties, collectively worth just over $6.17 million, with $1.5 million worth of lending secured against them. This means you have $4.67 million of equity.

The Two Scenarios

Say you were conservative and bought three properties in total and put them on interest-only loans.

The two scenarios we now have are:

Results of the Scenarios

The difference between the two scenarios is significant. At the end of the 30 year- period:

In Scenario #1 you would have one freehold property worth just over $2 million (using 5% compounding growth every year).

It's the same period, with the same-priced houses, but Scanario#2 generates 227% of the wealth of Scenario #1.

One reason some investors shy away from interest-only loans is the fear of increased repayments if the interest-only period stops at the end of 5-10 years. This would mean the investor would need to pay off the principal in 20-25 years and face higher payments.

When you run the numbers, these fears are mathematically irrational. That's because your mortgage – the biggest expense in any property – is not impacted by inflation, whereas the rent you charge your tenant is.

This means that by the time your mortgage becomes principal and interest, your rent has increased to the point where it can cover a larger proportion of these higher repayments. Investors can then have more consistent cashflow and put less money into the property than if they used principal and interest from day one.


Frequently Asked Questions About Interest Only Mortgages

How do you calculate interest only mortgage repayments?

Calculating interest only mortgage repayments is relatively simple. Take the interest rate and divide it by 100, then multiply it by your mortgage amount. This will give you the amount of interest you'll pay in one year.

Then divide that amount by 52 if making weekly repayments, 26 if making fortnightly repayments, or 12 if making monthly repayments.

For instance, if you had a $500,000 mortgage and were paying 4% interest and making monthly repayments, then you would:

  • 4/100 = 0.04
  • 0.04 x $500,000 = $20,000
  • $20,000 / 12 = $1,667 per month

Can you get an interest only mortgage?

Yes, interest only mortgages are still available in New Zealand, depending on which bank you talk to. Each bank has different policies, so it is best to talk to a mortgage broker when negotiating your loan.

When you apply for an interest only mortgage you need to give a reason why you want an interest only loan. For property investors, this can usually be as simple as interest only loans provide better savings for property investors when they still have a personal mortgage.

Note, however, that you will usually be given an interest only mortgage for a period of 5 years. At the end of those 5 years you will need to reapply to continue the interest only period.

How long can you have an interest only mortgage?

Generally banks will offer you an interest only period of 5 years. At the end of that 5 year period you can reapply for another 5 years.

However, this 5 year period is taken off your original loan term. This means that if you have a mortgage with a 30 year loan term and you opt to go interest only for 5 years, then you need to have the income to pay down the principal over a 25 year period.

Before the banks approve your interest only mortgage, they will test whether you have the income, right now, to afford the higher payments once the interest only period ends.

Why would you choose an interest only mortgage?

There are two reasons why an investor would opt to use an interest only mortgage as opposed to a principal and interest mortgage.

  • Firstly, an interest only mortgage is significantly cheaper than a principal and interest loan. This means that your investment property will require a much lower contribution each week from the investor. This means that an investor can afford to purchase more properties at one time, building a larger portfolio.
  • Secondly, an interest only mortgage is much more tax efficient, especially when an investor already has a personal mortgage. This is because an investor can use the money she would otherwise put into the investment property and use it to pay down his personal mortgage

Other Resources

Use our Mortgage Calculator to calculate a standard table mortgage. Or see our other calculators here.