What Is an Interest-Only Loan?
An interest-only loan is a type of financing where you only pay the interest on the borrowed amount for a certain period, without reducing the principal. In Malaysia, these loans are sometimes offered for property financing, especially for investors who want lower repayments at the start.
Unlike a standard amortizing loan, where each instalment includes both interest and principal, an interest-only structure keeps your monthly commitment smaller but leaves the loan balance unchanged until the end of the term.
Formula for Interest-Only Loan Payments
The monthly repayment is straightforward to calculate: Monthly Payment=Loan Amount×Annual Interest Rate12\text{Monthly Payment} = \frac{\text{Loan Amount} \times \text{Annual Interest Rate}}{12}
Example:
- Loan amount: RM600,000
- Interest rate: 4% per year
- Monthly payment = (600,000 × 0.04) ÷ 12 = RM2,000
During this period, the principal stays at RM600,000 until you switch to full repayments or refinance.
Interest-Only vs Normal Loan Payments
| Loan Type | Loan Amount | Rate (per annum) | Monthly Payment | Principal Paid |
|---|---|---|---|---|
| Interest-Only Loan | RM500,000 | 3.5% | RM1,458 | RM0 |
| Standard Loan (25yr) | RM500,000 | 3.5% | RM2,504 | RM1,046 |
Why Borrowers Choose Interest-Only Loan
- Lower monthly instalments during the first few years.
- Improved cash flow for property investors managing rental yield.
- Flexibility if your income is irregular or expected to rise later.
SEE MORE: Malaysia Fixed vs Variable Interest Rate Calculator
What Happens After the Interest-Only Period?
Once the interest-only phase ends (commonly 3–5 years), you must either:
- Switch to principal + interest payments, which increases instalments, or
- Refinance into another package.
For example, the RM600,000 loan above at 4% interest jumps from RM2,000/month (interest-only) to RM3,167/month once full repayments begin (20 years remaining).
Risks to Keep in Mind
- Loan balance doesn’t reduce during the interest-only phase.
- Total cost may be higher if you extend the term.
- Risk of payment shock once full repayments start.
FAQs About Interest-Only Loans in Malaysia
1. How do I calculate interest-only payments?
Multiply the loan balance by the annual interest rate and divide by 12.
2. Do I pay off the principal in an interest-only loan?
Not during the interest-only period; the balance remains unchanged.
3. Are interest-only loans available for property buyers in Malaysia?
Yes, but they are usually limited and offered under certain investment-focused packages.
4. What happens when the interest-only period ends?
You’ll need to start paying both principal and interest, which raises monthly instalments.
5. Who benefits most from interest-only financing?
Property investors who prioritise cash flow and short-term affordability.
Fredrick is the creator behind houseloancalculatormalaysia.online, dedicated to helping Malaysians easily understand and calculate their home loan payments. With a focus on accuracy and simplicity, Fredrick develops reliable tools and clear guides to empower users to make informed financial decisions. His goal is to provide trustworthy, user-friendly resources that save time and reduce confusion in the complex world of home loans.