Same rate, same balance, very different payment. How the interest-only vs. amortizing choice changes your cash flow, your DSCR, and what you owe at maturity.
Two loans with the same rate and balance can carry very different payments depending on whether they amortize. The choice between interest-only and amortizing structure shapes your cash flow, your DSCR, and how much you owe at maturity.
The difference in one line
- Amortizing: each payment covers interest and pays down principal, so the balance shrinks over time.
- Interest-only (IO): payments cover only interest for a set period, so the balance stays flat until amortization begins (or the loan matures).
Because IO payments skip principal, they’re lower — which raises early cash flow and improves DSCR during the IO period.
A quick comparison
A $5,000,000 loan at 7%:
- Interest-only annual payment: $5,000,000 × 7% = $350,000
- Amortizing annual payment (30-year schedule): roughly $399,000
On $500,000 of NOI, that’s a 1.43x DSCR interest-only versus 1.25x amortizing. The IO structure frees up about $49,000 of annual cash flow and can support a larger loan on the DSCR test. Model both in the Commercial Mortgage Calculator.
Why borrowers use interest-only
- Higher early cash flow — useful during lease-up, renovation, or any period before income reaches its stabilized level.
- Better early returns — more cash to the deal in the early years.
- Larger DSCR-supported loan — lower payments can lift proceeds when DSCR is the binding constraint.
The trade-offs
IO isn’t free. The principal you don’t pay down stays owed:
- No equity build from amortization — you don’t chip away at the balance, so you rely on value growth or a future paydown.
- Higher balloon at maturity — the full (or larger) balance comes due at the end of the term, increasing refinance risk.
- Lenders may size to the amortizing payment anyway — many underwrite DSCR on the fully amortizing payment even when they grant IO, so the cash-flow benefit doesn’t always translate into a bigger loan.
- Payment jump when IO ends — if IO converts to amortizing mid-term, the payment steps up, and the deal must absorb it.
When each makes sense
- Interest-only: transitional, value-add, and development deals where income is climbing toward stabilization, or where maximizing early cash flow matters.
- Amortizing: long-hold, stabilized assets where building equity and reducing refinance risk is the priority.
Many loans blend the two — a few years of IO followed by amortization — to balance early cash flow against deleveraging. See how lenders size CRE loans for how IO interacts with the sizing tests.
How Mercury helps
We model both structures against your business plan and the lender’s sizing approach, so you choose IO or amortization for the right reason — not just the lower headline payment — then run a competitive process where we’re licensed or exempt. Try the Commercial Mortgage Calculator, then discuss your financing scenario.
Frequently asked questions
Does interest-only get me a bigger loan?
It can, when DSCR is your binding constraint, because the lower payment supports more debt. But many lenders size DSCR on the fully amortizing payment regardless, so confirm how a given lender underwrites.
What happens when the interest-only period ends?
The loan begins amortizing and the payment steps up, or the loan matures and the balance comes due. Plan for that change before you choose IO.
Is interest-only riskier?
It carries more refinance risk because you don’t pay down principal, so a larger balance comes due at maturity. That’s manageable with a clear exit plan, but it’s a real trade-off.