Interest Only Mortgages in Canada

What are they and are they right for your needs? Let's dig in...

interest only mortgagesAs you search for the best mortgage option, it helps to understand the various forms of payment terms available at your disposal. One of these key terms of payment on your mortgage is called an Interest Only Mortgage. This is where the monthly payments in the initial instance is paid towards the interest of the amount borrowed. Based on the terms of the agreement the interest-only period may be negotiated as around 7 - 10 years. Subsequent to this, then the interest-only loan starts amortizing and the payment goes then to principal and interest for the life of the loan agreement.

Based on your conversation with your broker or mortgage rep, it is also good to have your mortgage calculator to hand. Be mindful that the result would be your estimated interest-only mortgage rate. This does not account for the principal payments being made when the mortgage is amortized. As with anything it makes sense to weigh the pros and cons of the risks, and if it also suits your own position.

Will An Interest Only Mortgage Be A Good Fit?

There may be a few situations that you can consider, as you seek out an interest-only mortgage. Maybe it is that you want to own the property for a while after or long enough to sell it. Maybe there is no need right away in building your home equity, then you can consider the interest only mortgage. The interest-only loan may also suit a person who is seeking a short financing for the new property as they look to sell their old property.

Surely There Are Benefits

Depending on the financial position of the borrower at that point in time, the interest only mortgage may be a very good fit.

No Principal Payments = More Cash

You are only paying for the interest on your mortgage. No principal payments implies having more savings since your monthly payment is likely to be lower. This is an opportunity to leverage your savings into a sound financial investment with higher returns over the same period. The extra you save today can lead towards a good return tomorrow. Maybe even lead to helping to pay your monthly amount down when the period of interest-only is over.

Principal Flexibility

Most lenders may allow you to start repaying the principal early. This repayment flexibility can be used to your advantage. For example, if you have had an increase in your income then the extra income can be used to pay towards the principal mortgage. This then means that you start to reduce the amount payable at the end of the interest-only period.

Tax Benefit

Mortgage interest paid on the property is deductible. This can be a plus, especially if you have a higher income or are in a high tax bracket. It is the mortgage interest deduction that can be used in holding down your income tax payments.

First Time Buyers Ease

Purchasing your own home for the very first time can seem overwhelming. Additionally when considering the payments which you have to make towards the interest, it may be a way for a first timer to ease into the mortgage space. The pain is not so much, especially if you are transitioning from renting an apartment to paying just the interest for a set period. This can work as your buffer for a little bit until the interest-only payment period is completed.

What Else Do You Need To Consider?

As you enter the market for your interest only mortgage, it is wise to ask your broker or mortgage agent a few things. This may include:

  • What are the payment options after the interest only payment period has expired?
  • Can you re-mortgage with your current lender and extend the repayment terms?
  • Maybe you can remortgage with a different lender. Are you allowed to do so?
  • Is the principal and remaining interest repayable in a lump sum?
  • Can you request equity to help repay the loan?

Is This The Right Choice?

Each mortgage option will have its pros and its cons. One particular type of mortgage may suit a borrower over that of another type of mortgage. Be sure that you are aware of all of the terms and conditions and risks involved. Your broker may work through with you that you must have a reliable source of funds. This is important to show that you can pay off the loan at the end of the interest-only period.

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