What is an interest-only mortgage?

An interest-only mortgage is characterized by a repayment structure where the borrower is responsible for paying only the interest on the loan for a specified period, typically ranging from 5 to 10 years. During this initial stage, the principal balance remains unchanged, meaning that the borrower is not reducing the amount they owe on the loan. This can result in lower monthly payments during the interest-only period, which may be appealing for borrowers who want to keep cash flow flexible. After the interest-only term expires, the borrower must begin paying both principal and interest, which can lead to higher payments and other financial implications later on.

The other options do not accurately reflect the concept of an interest-only mortgage. Some involve paying down the principal from the beginning or suggest features not typical for this type of loan, such as fixed rates with no fees or the ability to skip payments.