Interest-only periods: what they do to your payment and total cost

An interest-only period (avdragsfrihet) is a stretch of time where you pay interest but no principal. The instalment falls while it lasts, and the term comes up both on new Norwegian mortgages and on changes to existing loans. The arithmetic is simple, but the effect on total interest is often underestimated because it arrives later in the term.

What actually happens during the period

In an interest-only instalment, the payment covers only the interest that has accrued. Interest is calculated on the outstanding balance, and since no part of the payment goes to principal, the balance stands still. A two million kroner loan at five per cent nominal costs roughly 8,300 kroner a month in pure interest during such a period — and the debt is the same size the following month.

By comparison, an ordinary annuity loan with the same amount, rate and a 25-year term would have an instalment near 11,700 kroner, where the difference is the principal repayment that reduces the debt. That repayment is precisely what is being deferred.

Why the instalment rises afterwards

When the interest-only period ends, the full principal still has to be repaid — but now across fewer remaining instalments. With five years interest-only on a loan with a 25-year total term, the whole amount is repaid over the remaining 20 years. The instalment afterwards is therefore higher than it would have been without the period, not the same.

This is the part that surprises people most: an interest-only period moves the burden in time, it does not remove it. The longer the period, the larger the step up when it ends.

The effect on total interest

Interest is charged on the outstanding balance. When that balance is held flat for a period instead of falling, more interest accrues than otherwise — both during the period and indirectly afterwards, because repayment starts from a higher level. Total interest across the full term is therefore higher than on an equivalent loan without the period, all else equal.

How much higher depends on three things: how long the period runs, how large the balance is while it runs, and the rate during it. At high rates, deferring repayment weighs more heavily than at low rates.

Rules and practical points

Norwegian regulation and each lender's own practice set limits on when an interest-only period can be granted, including limits tied to the size of the debt relative to the property's value. The specific thresholds are revised over time, so check what applies when you read this, and what your own loan agreement says.

Note too that such periods are typically agreed for a fixed stretch, that the lender may attach conditions, and that it can affect how the loan is assessed in a later refinancing. These are contractual matters, not arithmetic.

How to estimate it yourself

You can approximate the effect with an ordinary loan calculator that has no dedicated interest-only feature. First compute plain monthly interest on the full loan amount — that is the instalment during the period. Then enter the same loan amount with the shorter remaining term to see the instalment afterwards. The difference in total interest between the two scenarios shows what the deferral costs.

In short

An interest-only period means a lower instalment now, a higher instalment later, and more total interest, because the balance does not fall in the meantime. Whether it is sensible depends on your situation and your agreement with the lender — this describes the mechanism, not a recommendation. The figures on this site are estimates for understanding orders of magnitude.