Interest-only expiry is the date on which a commercial real estate loan’s interest-only period ends and scheduled principal amortization begins, raising the monthly payment, often by 20% to 35% at current rates, and reducing the debt service coverage ratio by the same proportion on the same day. Loans originated in the low-rate years frequently carried three, five or seven years of IO, and a large share of those periods end in the current cycle. The expiry is a known date in the documents. Its effect on covenants, cash flow and distributions is calculable years ahead. Most owners find out when the servicer statement arrives with a larger number.
What happens at expiry
The payment. On expiry, the loan begins amortizing over the schedule in the documents (commonly 30 years) at the note rate. On a fixed-rate loan the new payment is fixed; on a floater it re-amortizes at each reset. See floating-rate re-amortization and SOFR tracking.
The DSCR. Actual debt service rises, so DSCR on actual debt service falls. If the lender tested on a hypothetical amortizing payment during the IO period, the covenant test does not change; if the lender tested on actual debt service, the covenant cushion shrinks by the payment increase. Read the definition. See DSCR and debt yield tests with lender-specific adjustments.
Cash flow to equity. Falls by the principal component. Distributions, reserve funding and guarantor liquidity all feel it.
Cash management triggers. A DSCR trigger tested on actual debt service can spring on the first post-expiry quarter. See cash management triggers and cash sweeps.
A worked example: the same expiry, two lenders
Two loans, each $30 million at 5.50% fixed with five years of interest-only ending next March, 30-year amortization thereafter. Each property produces $2.5 million of NOI on the lender’s definition.
Interest-only payment. $1,650,000 a year. DSCR on actual debt service: 1.52x.
Amortizing payment. $2,044,000 a year, a 24% increase. DSCR on actual debt service: 1.22x.
Loan A’s covenant. DSCR of 1.25x on actual debt service, tested annually in June. Before expiry: 1.52x. After: 1.22x. Breach at the first test after expiry, in a property whose performance has not changed. Options, starting now: grow NOI by $60,000 (a 2.4% increase, achievable with rent growth if leasing holds), prepay about $900,000 of principal to bring the amortizing payment to a passing level (at yield maintenance, which at today’s curve is near the 1% floor on the prepaid amount, about $9,000), or ask the lender for an IO extension in exchange for the paydown.
Loan B’s covenant. DSCR of 1.25x on a hypothetical 30-year amortization at the note rate, tested annually. Before expiry: the test already uses $2,044,000 of debt service and shows 1.22x. Loan B has been in breach for two years, and either the lender has waived it, the owner has cured it annually, or nobody has run the test on the lender’s definition. Expiry changes nothing about the covenant; it changes cash flow.
Same loans, same expiry, opposite situations. The difference is one sentence in the covenant definition.
Illustrative example: the same expiry under two covenant definitions
| Loan A | Loan B | |
|---|---|---|
| Covenant | 1.25x on actual debt service | 1.25x on a hypothetical 30-year amortization |
| Debt service tested before expiry | $1,650,000 (interest-only) | $2,044,000 (hypothetical) |
| DSCR before expiry | 1.52x | 1.22x |
| Debt service tested after expiry | $2,044,000 | $2,044,000 |
| DSCR after expiry | 1.22x | 1.22x |
| Effect of expiry | Breach at the first test after expiry | Covenant unchanged; cash flow falls |
Common mistakes at IO expiry
- Discovering it from the servicer statement. The date has been in the documents for five years.
- Assuming the covenant uses actual debt service. Read the definition; the answer changes the plan.
- Modeling the new payment at the closing amortization assumption. Partial IO and step structures vary.
- Prepaying without pricing the penalty. Yield maintenance on a partial prepayment is a real cost.
- Ignoring distributions. The equity cash flow drops by the principal component on day one.
The portfolio view
Across a portfolio, the questions are: which loans have IO expiries in the next 24 months, what is the aggregate payment increase by quarter, which loans fall below a covenant or trigger threshold on the new payment, and what is the effect on fund-level distributions. That is a schedule that can be produced today from the abstracts and the financials. See portfolio cash flow projections.
Options, and when to use them
- Do nothing. If DSCR after expiry stays comfortably above every threshold, the expiry is a cash flow event, not a covenant event. Plan the distributions.
- Grow NOI. Leasing and expense actions taken 18 months out can restore the cushion. This is the option that requires the earliest warning.
- Partial prepayment. Reducing the balance before expiry reduces the amortizing payment. Compare with the prepayment cost under the loan’s convention. See real-time prepayment calculations.
- IO extension. Some lenders will extend IO for a fee or a paydown, particularly relationship lenders. The request should go in before expiry, with the DSCR analysis attached.
- Refinance. If the loan is near an open period or the prepayment cost is modest, a new loan with a fresh IO period. Compare on the full cost. See the maturity wall refinancing playbook.
- Sell. If the post-expiry cash flow no longer supports the hold case. See loan-level valuations for investment committee.
What to track
- IO expiry date per loan, as a critical date with alerts at 24, 12 and 6 months. See loan critical date tracking.
- The post-expiry payment, computed under the loan’s amortization terms.
- DSCR before and after, on each lender’s definition, including whether the test uses actual or hypothetical debt service.
- Cash management triggers tested on actual debt service.
- Partial IO structures, where the IO period ends for part of the loan or steps down over time.
How this looks in LoanBoss
IO ending is one of the critical dates tracked for every loan, with alerts. Amortization types including interest-only and partial IO periods are modeled so the post-expiry payment is on the schedule from day one. Covenant and trigger tests use each lender’s definition of debt service, actual or hypothetical, so the effect of expiry on each test is visible in advance. The portfolio cash flow projection shows the aggregate payment change by period.
Frequently Asked Questions
Does IO expiry change the loan’s maturity?
No. The loan amortizes for the remaining term and the balloon at maturity is smaller than it would have been under full IO.
How large is the payment increase?
On a 30-year schedule at rates in the 5% to 7% range, roughly a quarter to a third above the IO payment. Compute it for the actual loan; the amortization term and rate govern.
Can we prepay part of the loan without penalty to reduce the payment?
Only if the documents permit partial prepayment and the convention makes it economical. Many fixed-rate loans charge yield maintenance on partial prepayments.
What if the lender’s test already used hypothetical amortization?
Then the covenant is unaffected by expiry and the planning is about cash flow, not compliance. Confirm in the document; do not assume.
When should we ask the lender for an IO extension?
Before expiry, with the DSCR analysis attached. Some lenders, particularly relationship lenders, will extend IO for a fee or a paydown.
Key takeaways
- IO expiry raises the payment by roughly a quarter to a third at current rates and lowers DSCR on actual debt service by the same proportion on the same day.
- Whether the covenant is affected depends on one sentence: whether the lender tests actual or hypothetical debt service. Read it before planning.
- Cash management triggers tested on actual debt service can spring in the first post-expiry quarter.
- Options are growing NOI, partial prepayment priced under the convention, an IO extension negotiated before expiry, refinancing or sale; the earliest option needs the earliest warning.
- Track the date with alerts at 24, 12 and 6 months, the post-expiry payment, and DSCR before and after on each lender’s definition.
- At portfolio level, the aggregate payment change by quarter belongs in the cash flow projection and the distribution plan.
Related reading
- Managing agency loans
- Balance sheet and bank loans
- DSCR vs. debt yield
- Loan portfolio dashboards with real-time rates
- Interest-only and amortization in the glossary
The IO period ends on a date you agreed to years ago. LoanBoss makes sure the payment increase is a plan, not a surprise.
Sources
- Mortgage Bankers Association, Commercial/Multifamily Mortgage Debt Outstanding and origination terms (2026)
- Trepp, interest-only loan share and performance in CMBS (2026)
- Fannie Mae and Freddie Mac, interest-only period conventions
- LoanBoss amortization tracking documentation, loanboss.com