An interest-only period is a phase of a loan term during which the borrower's payments cover only accrued interest, with no reduction of the principal balance. Once the interest-only period ends, payments typically shift to a fully amortizing structure, increasing the monthly payment as principal begins to be repaid, unless the loan matures or is refinanced before that transition occurs.
In commercial real estate, sponsors often negotiate an interest-only period, particularly during the early stages of a business plan when a property is undergoing renovation, lease-up, or repositioning and cash flow may not yet support full amortization. This structure can boost near-term distributions to investors, since more cash flow is available after debt service. The tradeoff is that principal is not being paid down during that stretch, which means the loan balance at refinancing or sale remains higher than it would under an amortizing schedule.
Further reading: Because You Built This
ACCESS
