Interest-Only (IO) Period

An interest-only period is a portion of a loan's term during which the borrower pays only accrued interest, with no principal reduction, keeping monthly payments lower and improving DSCR. IO periods are common in bridge loans (often the full term) and are increasingly offered on permanent loans (typically 1–5 years) before the loan converts to a fully amortizing payment.

Interest-only structures maximize near-term cash flow to the borrower by deferring all principal reduction, which is why they're standard on bridge, construction, and value-add loans where the sponsor wants to preserve cash flow during a lease-up or renovation period rather than paying down principal on an asset that isn't yet stabilized.

On permanent loans, lenders increasingly offer a partial IO period — commonly 12 months to 5 years — as a competitive feature, after which the loan converts to a standard amortizing payment for the remainder of the term. An all-IO permanent loan (no amortization for the full term) is less common and typically reserved for the lowest-leverage, highest-quality deals.

Because IO payments are lower than an equivalent amortizing payment, IO loans show a higher DSCR for the same NOI and loan amount — a fact underwriters account for by sometimes stress-testing DSCR against the eventual amortizing payment, not just the initial IO payment, especially when the IO period is short relative to the loan term.

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