Interest-Only Period (I/O)
A period, usually measured in months, when the borrower pays only interest and does not reduce loan principal.
Definition
An interest-only (I/O) period is the stretch at the start of a loan—or sometimes for the full term—when required payments cover interest only. Because no principal is due, monthly debt service is lower than on a fully amortizing schedule, which can raise cash flow, DSCR, and cash-on-cash return during lease-up or early ownership. After the I/O period ends, payments step up to principal-plus-interest based on the remaining term and amortization. Lenders limit I/O based on credit quality, LTV, and property cash flow; many small bay bank loans offer 0–24 months of I/O, while longer I/O is more common on certain agency or bridge products.
Example
On a $1,000,000 loan at 6.0%, interest-only debt service is about $5,000/month ($60,000/year). After a 12-month I/O period, payments convert to a 25-year amortizing schedule and rise because principal repayment begins.
See Also
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