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1. Describing a derivative in which the underlying asset is future interest payments on a pool of mortgages or other debt obligations. Interest-only derivatives are highly exposed to prepayment risk as homeowners who pay off their mortgages or loans early do not generate any more interest payments.

2. Describing a non-amortized loan. During the payment period of interest-only loans, one only pays on the interest that accumulates but not on the principal. At the end of the loan's term, the entire principal is due. An example is an interest-only mortgage, in which one makes interest payments for the term of the mortgage and then refinances in order to pay the principal at maturity.

interest-only (IO)

Of or relating to a derivative mortgage security scheduled to receive interest only from a pool of mortgages. An IO derivative security has no par value, and the owner of the security can lose money because of mortgage prepayments that reduce or eliminate interest payments. Compare principal-only.
References in periodicals archive ?
If you already have an interest-only loan, Dunagan recommends speaking with a specialist to determine your refinance options, taking into consideration how much longer you plan to stay in the property and how much you can afford to pay.
Lenders and intermediaries can and should do more to tackle current problems with interest-only mortgages.
Plan your strategy with confidence using forecasts of the proportion of interest-only mortgages as a repayment vehicle up to 2010.
Evaluate the risk of interest-only mortgages and understand what steps your business can take to reduce its exposure.
Interest-only mortgages have become increasingly popular
Interest-only mortgages now account for a significant proportion of mortgages in the UK
Their popularity is not surprising given that interest-only mortgages provide a number of opportunities for borrowers
69% of the Pool 5 loans provide for interest-only payments and have an interest-only period of ten years after origination.