How the interest-only payment is worked out
On an interest only loan you pay only the interest, so the balance does not fall. The monthly payment is the loan times the yearly rate, divided by 12. On $100,000 at 6% that is $500.00 a month. Interest only is by design on a securities-backed line of credit, and common on investment property loans.
With the example inputs, $100,000 at 6%, the loan costs $500.00 a month, $6,000.00 a year, and $60,000.00 in interest over 10 years. You still owe the $100,000 at the end, so you repay $160,000.00 in all.
What the investment must earn
Interest on a loan used to invest is a cost the investment has to beat. With no tax on the return, the return needed just to cover the interest is the loan rate: 6%. If a quarter of the return goes in tax, you need 8% before tax to cover the same interest.
The calculator also shows an illustration: the loan invested in full at an example 7% a year, with the return added back each month. After 10 years that would be worth $200,966.14, which is $40,966.14 more than you would have repaid. With 25% tax on the return it would be worth $168,852.42. If the return is zero, you would be $60,000.00 short of repaying the loan and the interest. This is an illustration, not a forecast, and returns can be lower or negative.
Interest only first, then repayments
You can pay interest only for part of the term. Interest only for the first three years of a 10 year loan, then repaying the balance over the remaining seven, costs $1,460.86 a month after the interest only period, and $40,711.86 in interest in all.
To work out the repayments and compare a lump sum, use the investment loan repayments calculator.
Risks of borrowing to invest
FINRA explains that a securities-backed line of credit requires monthly interest-only payments, the interest rate on the loan can change every day, and lenders may call the loan at any time. If the account falls in value you may get a maintenance call, which FINRA says typically allows two or three days to post more collateral or repay.
Borrowing to invest magnifies losses as well as gains: the loan has to be repaid whatever the investment does. Tax treatment of the interest and the return depends on your own position, so check it with a tax adviser.
For the UK version of this calculator, open the UK interest only investment loan calculator.
Inputs for the interest only investment loan calculator
Loan amount
The amount you borrow to invest, or borrow against your investments.
Interest rate
The yearly rate, charged monthly at one twelfth. The rate shown is only an example. A variable rate can change.
Loan term
How long the whole loan runs, including the interest-only period.
Interest-only period
How long you pay only interest. Make it the full term to repay everything in one lump.
Return you expect on the investment
Your own yearly assumption before tax. It is not a forecast.
Tax on the investment return
The share of the return paid in tax, from your own position. Enter zero if none.
CALCULATOR QUESTIONS
US interest only investment loan calculator questions
How is interest-only calculated on an investment loan?
The loan times the yearly rate, divided by 12: $500.00 a month on $100,000 at 6%.
What return do I need to cover the interest?
At least the loan rate, 6% on the example, with no tax. With 25% tax on the return it is 8% before tax.
What do I owe at the end?
The whole loan, unless you stop interest only part way and repay the balance.
What if the rate changes?
The result holds only for the rate you enter. Enter a different rate to test it.
Is the investment value a forecast?
No. It is an illustration of your own assumed return, with the return added back monthly. Returns can be lower or negative.
Is the interest tax deductible?
That depends on your own position and country. This calculator does not apply tax relief to the interest.