Interest-only (bullet) loan
A loan on which only interest is paid throughout the term, the principal being repaid in a single payment at maturity, often from a pledged investment. More costly in interest than an amortizing loan, it mainly suits buy-to-let investors who maximize the tax deductibility of interest and preserve their cash.
Key points
- Principal is repaid only at loan maturity, in a single payment, from a pledged investment built up alongside.
- Monthly payments include interest only, making them lower than those of an equivalent amortizing loan.
- Total interest cost is higher because the calculation base remains constant throughout the term.
- Mainly used in buy-to-let investment to maximize the tax deductibility of interest.
Frequently asked questions
How does the pledge mechanism work in an interest-only loan?
The borrower simultaneously builds up a financial investment (often a life insurance contract) whose capital is pledged in favor of the lending bank. This investment must reach, at maturity, a sufficient amount to repay the borrowed principal. The bank generally requires the investment to be subscribed to its own products. If the investment underperforms, the borrower must make up the shortfall from their own funds.
Why is the interest-only loan mainly used in buy-to-let investment?
In a buy-to-let context, loan interest is deductible from rental income. With an interest-only loan, the interest calculation base never decreases, keeping deductibility at its maximum throughout the term. Conversely, in an amortizing loan, interest falls each year with the outstanding balance, progressively reducing the tax benefit. This effect is particularly relevant for heavily taxed borrowers.
What risks should a broker flag to a client considering an interest-only loan?
The first risk is pledged-investment performance: if markets disappoint, the borrower will not have the capital needed for final repayment and will need to refinance or sell the property. The second is the higher total interest cost compared to an amortizing loan, which is only offset if there is a real and significant tax benefit. Finally, this product is more complex to analyze in true cost terms and requires precise simulation, particularly regarding the assumed investment return.
In practice
An investor acquires a rental apartment at €180,000 via a 15-year interest-only loan: they pay only interest each month and simultaneously build up a pledged life-insurance contract. With interest remaining constant throughout, they deduct the same amount from their rental income each year, optimizing their tax position throughout the period.
Official sources
- FISE model (annex art. R313-8): in fine repayment · Légifrance — Code de la consommation
- Obtaining a mortgage loan · Service-Public.gouv.fr
- Mortgage credit (official guide) · Service-Public.gouv.fr