Interest-Only

An interest-only loan requires the borrower to pay only the interest charge each month, without reducing the capital balance. At the end of the term, the full original loan amount is repaid in a lump sum. This structure gives lower monthly payments compared to a capital-and-interest (repayment) loan of the same amount.

Interest-only structures are common in bridging finance, development finance, and some commercial mortgages. For bridging loans specifically, interest is often rolled up (added to the loan balance and paid at redemption) rather than paid monthly, which eliminates any monthly cash flow obligation during the term.

The risk of interest-only is that the capital balance remains constant throughout the term - there is no equity build-up through capital repayment. The lender's security must be sufficient to cover the full capital balance at all times. Exit strategy is critical: the borrower must have a clear, credible plan to repay the capital (typically through property sale, refinance, or business profits).

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