In one sentence
A span during which the borrower pays only interest, deferring principal amortization to later in the term.
The longer version
Interest-only periods lower early payments, improving cash flow when a property is stabilizing or a sponsor is executing a business plan. Full-term interest-only is common on lower-leverage institutional loans.
The tradeoff is a larger balance at maturity, which raises refinance and balloon risk that underwriting has to account for.
Common questions
- What is an interest-only period?
- A span during which the borrower pays only interest and no principal, usually at the start of the loan term, before amortization begins.
- Why do lenders offer interest-only periods?
- To improve cash flow during lease-up or a business plan, or on low-leverage loans where amortization is less important to the lender's risk.
- What happens when the interest-only period ends?
- Payments step up to include principal. Underwriting tests the property's coverage on the amortizing payment, not just the interest-only payment.
Keep reading
- The due diligence checklist, built to be runChecklists as systems, not documents.
- The commercial loan closing processThe five stages from term sheet to funded.
- How life companies run commercial mortgage operationsThe long servicing tail.
- Commercial loan softwareWhere this sits in the lending stack.
- Commercial real estate loan calculatorRun the payment and the balloon on your own loan.