What type of mortgage requires only interest payments during the loan term?

An interest-only mortgage is a type of loan where the borrower is required to pay only the interest on the principal balance for a specified period, typically during the early years of the mortgage term. This means that during that initial period, the payments do not reduce the principal amount owed. At the end of the interest-only period, the borrower will either need to start paying both principal and interest, modify the loan, or pay off the remaining balance.

This structure can be attractive for some borrowers, particularly those who anticipate increased income or a surge in property value in the future, allowing them to manage their cash flow more effectively during the early years of the loan. It is important to note that while this type of mortgage provides lower initial payments, it can result in a significant increase in payments once the principal repayment period starts, as the borrower would need to begin paying off the amount borrowed, often leading to a larger financial burden later on.

The other types of mortgages typically involve either fixed payments that include both principal and interest or adjustments based on market rates, which means they do not fit the definition of a loan where only interest payments are required during the initial phase.