Interest-only is the most effective single lever for improving a DSCR that falls short. Removing principal from the payment cuts the monthly obligation materially, which raises coverage and cash flow at once. What it does not do is build equity, and the payment shock at recast is real — so it is a tool with a specific job rather than a default choice.
How the structure works
A typical structure is a 30-year loan with a 10-year interest-only period. During those ten years you pay interest only; afterwards the loan amortises the full original principal over the remaining twenty years. On a $300,000 loan at 7.5%, interest-only is $1,875 a month against roughly $2,098 fully amortising — a saving of about $223. At recast, the payment on twenty years rather than thirty rises to roughly $2,417.
The effect on your ratio
This is the point. Take a property renting at $2,400 with $600 of taxes, insurance and dues. Fully amortising, PITIA is about $2,698 and DSCR is 0.89 — below most lenders’ floor. Interest-only, PITIA is about $2,475 and DSCR is 0.97. Add a modest rate buydown and the same property clears 1.00. That swing is frequently the difference between a deal funding and not, and it is why interest-only is the first thing a good broker reaches for on a marginal file.
What you are giving up
No amortisation. After ten years you owe exactly what you borrowed, so equity comes only from appreciation and whatever you have improved. Over a long hold that is a meaningful amount of foregone paydown. Rates on interest-only products are typically slightly higher. And the recast payment increase is substantial — on the numbers above, about 29% — arriving on a fixed date whether or not rents have kept pace.
When it makes sense
Short-to-medium holds where you expect to sell or refinance before recast. Value-add projects where cash flow is tight during stabilisation and rents will rise. Portfolio builders prioritising deployable capital over equity accumulation. Properties in appreciating markets where the equity is coming from value growth rather than paydown. And marginal DSCR files that qualify no other way.
When it does not
Long-term buy-and-hold where paydown is a core part of the return. Flat or declining markets, where no appreciation arrives to substitute for amortisation. Properties with limited rent growth that will face the recast on today’s rents. And any situation where the recast has not been modelled — run the post-recast payment through the DSCR calculator at purchase and confirm the property still covers it, because that is the year the structure is tested.
Interest-Only DSCR Loan FAQ
Commonly five or ten years on DSCR products, after which the loan amortises over the remaining term.
Yes, and often materially — removing principal from PITIA can be the difference between falling below a lender’s floor and clearing it.
Usually modestly higher than the fully amortising equivalent, reflecting the slower principal reduction.
The loan recasts and amortises the full original balance over the remaining years, producing a noticeably higher payment on a known date.
Generally yes, subject to any prepayment penalty. Voluntary principal payments reduce the balance that recasts later.
It carries no amortisation and a scheduled payment increase, so it depends on having a plan for both. Used with a defined hold or refinance horizon it is a legitimate structuring tool.