What is an "interest-only" mortgage?

An interest-only mortgage is defined as a type of loan where the borrower is required to pay only the interest on the principal balance for a specified period, which typically lasts for a few years. During this time, the monthly payment does not reduce the principal amount borrowed, meaning that the borrower does not build equity in the property during that period.

After the interest-only period ends, the borrower will then start paying both the principal and the interest, which can result in significantly higher monthly payments. This type of mortgage can be beneficial for borrowers who may expect an increase in income in the future, or who want to keep their monthly payments lower in the initial years of the loan.

Other options presented do not accurately capture the essence of an interest-only mortgage. For instance, a mortgage with no monthly payments for a year would imply a deferment of payments which is different from simply paying interest. A variable interest rate mortgage refers to loans where the interest rate can fluctuate over time, separate from the structure that allows for only interest payments. Lastly, a loan that does not require collateral would not be classified as a mortgage since mortgages are secured loans where the property serves as collateral.