Reference

Three loan structures, three risk profiles.

Fully amortising, interest-only, and balloon loans look similar in the early years and diverge dramatically at maturity. Understanding what's left at the end is the only way to choose between them.

Fully amortising

The default structure for residential mortgages and most consumer loans in Canada, the US, and Europe. Each payment includes principal and interest such that the balance reaches zero exactly at maturity. The borrower owns the asset free of debt at the end of the term.

Trade-off: the early payments are heavy on interest (see the mechanics page) and the borrower builds equity slowly in the first few years.

Interest-only

Each payment covers only the interest accrued in that period. The principal balance is unchanged from start to finish. At maturity the entire original principal is due as a lump sum.

Used in three contexts:

Buy-to-let / investment property. Common in the UK and Australia, where rental income service the interest and the property is sold or refinanced at maturity.
Construction loans. Interest-only during the build phase, converting to amortising once the property is occupied.
Bridge financing. Short-term loans (6–24 months) covering the gap between purchase and longer-term financing.

Risk: the borrower must have a credible plan to repay the principal at maturity — sale, refinance, or accumulated savings — or face forced liquidation.

Balloon

A hybrid structure: amortising payments are calculated on a long schedule (e.g., 30 years), but the loan matures earlier (e.g., 7 years). At maturity, the remaining principal balance is due as a single payment — the “balloon.”

Common in commercial real estate (5/25 or 7/25 structures), some US residential lending, and equipment finance. The product gives the borrower lower monthly payments than a 7-year fully amortising loan would and a clearly defined refinance trigger at the maturity date.

Reference: $300k, 6% rate, sample structures

Structure	Term	Monthly	Year-7 balance	At maturity
Fully amortising 25y	25	$1,919	$262,200	$0 at year 25
Fully amortising 7y	7	$4,387	$0	$0 at year 7
Interest-only 7y	7	$1,500	$300,000	$300,000 lump
Balloon 7/25	7	$1,919	$262,200	$262,200 lump

The balloon and fully-amortising-25y are identical in monthly payment for the first 7 years. The difference is what happens after: the 25-year loan continues to amortise; the balloon demands the remaining $262,200 in cash. Most balloon borrowers refinance at maturity rather than pay the balance in cash.

The maturity-event risk

Both interest-only and balloon loans have a refinance event built into the contract. If interest rates have risen by maturity, the new loan is more expensive. If property values have fallen, the LTV is higher and the new loan may be impossible to obtain. The 2008 US crisis is a case study: many subprime borrowers held 5/25 ARMs that re-priced into a hostile rate environment with depreciated collateral. The product was viable in 2003 and catastrophic in 2008.

Choosing

Owner-occupier with intention to stay long-term: fully amortising. The certainty of an amortisation curve outweighs any near-term cash-flow benefit.
Investor with rental property and refinancing plan: interest-only is defensible if cash flow drives the business case.
Commercial borrower with predictable maturity-date refinancing: balloon can be appropriate, but the maturity event must be planned for.
Speculator hoping to flip before maturity: any structure works for the speculator until it doesn't. The structure matters most when the speculation fails.