Interest-Only Period

An interest-only (IO) period is the phase of a loan during which the borrower pays only interest, with no principal amortization. After the IO term ends — often 1 to 5 years — the loan converts to fully amortizing payments of principal and interest (P&I).

How it's used: IO is common on bridge and value-add loans, where the sponsor wants maximum early cash flow during a renovation or lease-up before the property stabilizes. Because the payment is lower, IO raises the early-year DSCR and cash-on-cash return.

Why it matters: IO is a double-edged tool. It improves near-term coverage and cash flow, but you build no equity through paydown during the period, and there's a payment shock when the loan converts to P&I — the same NOI now has to cover a higher debt service. A deal that only pencils because of IO coverage can be in trouble at conversion if NOI hasn't grown. Always underwrite the DSCR at the amortizing payment, not just during IO.

Formula: IO payment = Loan balance × annual interest rate (vs. amortizing P&I, which adds principal).

It pairs closely with loan-to-value and the debt yield test. Model coverage during and after IO on the DSCR calculator.