Deferral of payments
A guide for anyone wondering what an interest-only period means.
Eiendomsfinans, as experts in personal mortgages, sheds light on interest-only periods. This guide is designed for loan applicants and homeowners with minimal knowledge of the subject.
January 23, 2024
Julianne Gåsvær
The Difference Between an Interest-Only Loan and an Amortizing Loan
Interest-Free Period:
With an interest-only period, the borrower has the option to pay only the interest on the loan for a specific period, usually up to 5 years at a time.
During this period, repayment of the loan amount itself (the principal) is deferred, so that the borrower only has to pay interest.
A grace period gives the borrower financial flexibility for a certain period of time, which can be particularly useful when facing other major expenses. These may include high interest rates, periods between buying and selling a home, or during the start-up phase.
Loans with installments:
In an installment loan, the borrower pays both interest and a portion of the loan amount itself (the principal) each month.
The monthly payment consists of an interest portion and a principal portion. The interest portion goes to the bank as payment for borrowing money, while the principal portion reduces the total loan amount. The breakdown of these portions differs between annuity loans and serial loans; you can read more about this here.
Over time, loans with principal and interest payments lead to a gradual reduction in the outstanding debt, and the borrower owns a larger share of the asset (such as a home) at the end of the loan term.
Overall, an interest-only loan provides short-term financial relief by reducing monthly loan payments, while a loan with principal and interest payments leads to the long-term repayment of the loan amount itself.
The choice between an interest-only loan and a loan with principal and interest payments depends on the borrower’s financial situation and preferences.
Get help applying for a mortgage with an interest-only period
Eiendomsfinans specializes in addressing the unique lending needs of individuals. Whether you’re a first-time buyer or an experienced homeowner, our experts ensure a personalized approach to your financial needs.
Understanding the fundamental difference between interest-only loans and amortizing loans is crucial for making sound decisions. An interest-only period—during which only interest payments are made—allows borrowers to defer repayment of the principal for a specific period. On the other hand, loans with principal payments involve regular payments of both interest and principal, which ensures a gradual reduction in the loan balance.
Custom Solutions
Eiendomsfinans prepares loan applications tailored to individual financial situations.
Flexible terms: A grace period allows for flexibility in the payment structure to accommodate varying financial circumstances.
Eiendomsfinans’ expertise: You can count on our specialists to guide you through choosing the right type of mortgage.
Summary
Loans without principal payments should only be used to ease financial obligations in cases where reducing spending is not enough. It is a more expensive option than a loan with installments, where you pay slightly less in interest for each month you make a payment toward the principal.
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FAQ: Payment Deferral
What are the requirements for an interest-free repayment period?
The mortgage cannot exceed 60% of the home’s value. In other words, if your home is worth 5 million, you can apply for an interest-only period if your loan is less than 3 million.
What does "payment holiday" mean in the context of a mortgage?
An interest-only period allows borrowers to pay only interest for a certain period of time, enabling them to reduce their monthly mortgage payments during that time.
How long can you have a payment deferral?
It varies and depends on individual agreements. Normally, you can apply for up to 5 years. Once this period has expired, you can apply for a new period if you wish. The bank will then reassess the situation. In doing so, they will take into account whether the value of the home has decreased significantly and whether the customer has made timely payments during the interest-only period.
Is a payment-free period suitable for first-time homebuyers?
This applies equally to all types of homebuyers, but first-time buyers usually do not have the 40% down payment required to qualify for this.
Can existing homeowners apply for a mortgage with an interest-only period?
Yes, Eiendomsfinans offers solutions for existing homeowners who want to refinance or switch to a mortgage with an interest-only period.
Is it easy to get a payment deferral?
The amount of your mortgage relative to the value of your home affects your options. If your loan is less than 60 percent of your home’s value, it’s usually easy to get a payment deferral approved. If, on the other hand, your loan is more than 60 percent of your home’s value, it will be more challenging to get this approved.
Can you make payments even if you have a payment deferral?
Yes, you can make additional payments or prepayments on your loan at any time if you have a variable-rate loan. If you have a fixed-rate loan, you must stick to the original payment schedule for the entire period during which the interest rate is fixed.