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Interest-Only Then Term Loan (Two-Phase)

Section titled “Interest-Only Then Term Loan (Two-Phase)”

Objective — begin with an interest-only loan while cash flow is tight, then convert to an amortizing term loan once cash flow allows, so the debt still retires without under-investing at the start.

Risk level — 2 — Moderate risk. Risk justification — net market exposure increases, so level 2 at minimum; the exposure profile is interest-only’s for phase 1 and term-loan’s for phase 2, and neither phase is callable. Benefit justification — unverified — needs Talbot. Jurisdiction — Canada.

Prerequisites

Section titled “Prerequisites”
  • The prerequisites of both component strategies.
  • A savings period longer than 15 years — SDC’s own stated condition.
  • Either an expectation that cash flow will grow over time, or initial cash-flow usage below 50%.

Mechanism

Section titled “Mechanism”

From SDC’s own course-content notes:

  • If 100% of available cash flow goes to interest payments, principal cannot be paid down. That is the constraint phase 1 accepts deliberately.
  • Principal can be paid down later if the initial cash-flow usage was under 50%, or if cash flow inflates over time.
  • Modelling requires two distinct time horizons. Savings in phase 2 (term loan) exceed savings in phase 1 (interest-only). Phase 2’s savings capacity determines the maximum term loan, which in turn sets the maximum interest-only loan for phase 1.

That last sentence is the strategy’s actual design rule: the phase-2 constraint sizes phase 1, not the other way round.

Benefits

Section titled “Benefits”
  • Puts a larger amount to work earlier than a term loan the investor could afford today.
  • Still ends with the debt retired, unlike a permanent interest-only position.
  • Positioned by SDC as a responsible implementation strategy in courses and training.

Risks

Section titled “Risks”
  • Phase 1 carries interest-only’s full risk profile with none of its amortization.
  • The conversion depends on cash flow actually growing. If it does not, the investor is left holding an interest-only loan sized for a phase 2 that never arrives — the central risk of this strategy.
  • Rate risk spans both phases and a rate rise can prevent the conversion.

Failure modes

Section titled “Failure modes”
  • Sizing phase 1 against hoped-for future cash flow rather than the stated rule (phase 2 capacity sets the ceiling).
  • Reaching the conversion date in a drawdown, when amortizing is hardest.
  • Using 100% of cash flow for interest in phase 1, which the source states makes principal paydown impossible.

Costs

Section titled “Costs”

Interest across both phases plus principal in phase 2; any cost of converting the facility.

Tax considerations

Section titled “Tax considerations”

Interest deductible in both phases under ITA §20(1)(c) while proceeds remain traceable to income-producing property. The deduction declines through phase 2 as the balance amortizes.

Who it may suit

Section titled “Who it may suit”

A long-horizon investor with rising income whose current cash flow supports interest but not amortization — the case SDC built the strategy for.

Who should avoid it

Section titled “Who should avoid it”

Most people, per Rule 1. Specifically anyone whose income is flat or uncertain: the strategy’s whole premise is that phase 2 becomes affordable.

Implementation outline

Section titled “Implementation outline”
  1. Establish phase-2 savings capacity first — it sets the maximum term loan.
  2. Derive the maximum phase-1 interest-only loan from that ceiling.
  3. Keep phase-1 cash-flow usage below 50% if the plan relies on later principal paydown.
  4. Model both horizons explicitly, across a range of returns including negative ones.

Evidence status

Section titled “Evidence status”

documented — the strategy, its >15-year condition, its cash-flow constraint and the phase-2-sizes-phase-1 rule are all stated in Smart Debt Offerings, “Interest Only then Term Loan Combinations”. Not implemented in sd-math: the accuracy audit lists combinations among the strategies absent from src/sd_math, and notes LevPro’s VB6 source has no equivalent to port from — building it would be new design work, not a port.

Counterarguments

Section titled “Counterarguments”
  • The two-phase structure adds complexity to a strategy most people should not use at all. Fair, and Rule 1’s answer stands: complexity here is not a reason to simplify the message toward action.

Variants

Section titled “Variants”

unverified — needs Talbot — whether the conversion is a contractual feature of one facility or a refinance into a second.

Section titled “Related strategies”

interest-only-investment-loan · term-investment-loan · lifecycle-leverage-glide-path · conservative-leverage-ratio

Sources

Section titled “Sources”
  • Smart Debt Offerings — “Interest Only then Term Loan Combinations”: the >15-year condition, the cash-flow constraint, and the two-horizon modelling rule
  • ~/projects/monorepo/packages/sd-math/docs/accuracy-audit.md §4 — combinations are not implemented
  • SDC/_WorkingOn/Projects/SD-App/logs/2026-03-27_Phase-M4-Monthly-Complete.md — combo strategies named as identified future scope

Open questions

Section titled “Open questions”
  • Whether the conversion is contractual or a refinance.
  • Whether SDC intends to model this in sd-math M6, which the audit implies but does not commit to.