The Canadian mortgage market has a wide variety of mortgages for homebuyers. While most people choose the more mainstream mortgages with regular terms, there are other mortgage types that may be better suited for you. Each situation is unique and has its own risks, but what may be a disadvantage to some people, could be an advantage for you. But first, what is an interest-only mortgage?
An interest-only mortgage allows the borrower to make payments based on just the interest rate for the initial term, instead of paying down both the principal and interest. Terms are often short, 1-2 years, although some lenders offer a longer term. The term of the mortgage can also be either open – meaning you could pay it out at any time – or closed, depending on your needs. Remember that interest-only payments don’t help you build equity in your property.
When your mortgage comes up for renewal, you have the options to choose an interest-only solution, a traditional mortgage with principal and interest payments, or paying out the loan completely. The thing to keep in mind is that the payments (principal + interest) will potentially be much higher than the interest-only payments.
Who should consider this type of mortgage?
An interest-only mortgage has some potential advantages that you won’t get with other mortgages:
- Improve your monthly cash flow. Since the monthly payments will be lower than a traditional mortgage, this solution provides more financial flexibility. At the end of the day, you need to be able to make your payments, and this may be the only option that allows you to do so.
- Complete on your home purchase. Whether your original financing fell through, or you haven’t managed to sell your previous property, an interest-only mortgage could let you close the deal on your new purchase and give you some breathing room to find a long-term solution. Bridge loans are almost always interest-only.
- Use prepayments privileges to build equity. You can use extra money such as a bonus, raise, tax refund, etc., to pay down the principal balance. This will allow you to keep your day-today budget and choose whether you put your extra money towards your home equity, or if you have any unexpected costs. Depending on your lender, the lower principal (after the extra money is paid down on the mortgage principal) generates a slightly lower payment each month, compared to a traditional mortgage where monthly payments will stay the same if you make a prepayment. This could allow you to benefit immediately from lower monthly payments.
Having a plan and being disciplined with your money is a “must”, to have this type of mortgage. Working with a mortgage planner can help you determine your exit strategy after the initial interest-only term is done. Planning your payments accordingly and knowing when your payments will increase with a professional estimate of how much, means you will be better prepared to avoid future financial risks.
Ready to find out whether an interest-only mortgage is the right solution for you? Our team is here to help. Fill out our contact form or give us a call at 250-590-6520 (toll-free 1-855-590-6520) to see how we can find the best solution for your situation.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.
This post reflects the best available information at the time of writing/last update. To ensure that you have the most up-to-date information, contact us to confirm the details for your specific situation.