Instruments regarded as interest-only
- Question ID: 2018/0006
- Date of publication: 24/01/2018
- Subject matter: Loans price and other conditions
- AnaCredit Manual: Part II
- Data attribute: End date of interest-only period, Payment frequency
How should instruments be reported where they have agreed payment schedules stipulating that principal and interest should be paid in a specific sequence (e.g. where interest is payable every month, but principal is only payable at the end of each quarter)? Can such an instrument be regarded as interest-only? And if so, how should the end date of the interest-only period be reported? Is it the case that interest-only instruments are instruments where, for one or more contractually defined periods, only the interest on the principal balance is paid, with the principal balance remaining unchanged?
The data attribute “end date of interest-only period” indicates whether, on the reporting reference date, the instrument is within a period during which the debtor is paying only the interest.
The question of whether an instrument is interest-only on a reporting reference date does not depend on the frequency of the payment of interest and principal. For an instrument to be interest-only, the contract has to set out a period where only interest is paid.
In other words, if the contract does not set out a period during which only interest on the principal balance has to be paid, the instrument is not interest-only, regardless of the frequency of interest and principal payments.
So, in the absence of explicit provisions in the contract, an instrument is not interest‑only on any reporting reference date, even if there are periods during which, effectively, only interest is paid (e.g. in the case of monthly interest payments and quarterly principal payments).
It should also be noted that, if a reporting reference date falls within an interest-only period, the end date of that interest-only period is, unless the contract explicitly provides otherwise, the date of the final interest payment during the interest-only period.
The question of whether the principal balance remains unchanged during a contractually defined interest-only period is irrelevant in this regard, as is the question of whether the debtor makes the required interest payments.