Interest Only Mortgage Explained

interest only mortgage

In this article, we will talk about such an option as an interest-only mortgage. The real estate market in Canada offers hundreds of thousands of options – from small studio apartments to luxurious three-story mansions.

Accordingly, the offers of banks are also diverse and you can choose the best option suitable for your life and budget. An interest-free mortgage is one of the low-popularity but no less interesting programs.

Briefly About the Main Thing 

To be honest, an interest-only mortgage is practically the same as any other mortgage program. However, in this case, the borrower’s regular payments cover only the interest accrued for the current period. But ordinary loans also require this condition to be met in addition to the repayment of the principal amount of the loan.

Please note: interest-free mortgage in Canada is not the best option for buyers. As a result, the borrower will pay more than if they took out a traditional loan. 

To get a mortgage without interest you need to:

  • confirm your income;
  • provide a “clean” credit history;
  • make an initial deposit.

Before agreeing to checkout this niche product, be sure to read the rules for its use. As a rule, this is the best option for people with low or irregular incomes. The bank’s client makes a minimum initial payment and concludes an agreement according to which they pay only interest (the principal amount of the debt remains unchanged). Thus, even a low-income person can afford to buy a house or apartment on a mortgage.

This is interesting: often, to make a profit in the short term, investors use an interest-only mortgage. This practice is quite risky and is only suitable for those people who are well versed in the fluctuations in the real estate market.

Interest Only Mortgage: Risk Assessment Versus Classic Mortgage

When applying for a classic mortgage, you get closer to becoming the owner of the property with each new payment. Accordingly, when you pay only interest, then the principal amount of the debt does not decrease. Accordingly, the house does not come into your possession.

Approximate risks when applying for an interest-only loan:

  • you have lost your main job and cannot continue making payments;
  • after the expiration date, you cannot switch to another type of mortgage due to your financial problems;
  • you cannot pay the amount of the mortgage on the purchased housing, including interest.

Please note: The interest-only payments program is a bit like renting an apartment with the possibility of its further purchase from a bank.

Always have a financial parachute if you have a difficult life situation and you urgently need to pay off your mortgage. This will help you avoid unnecessary problems and increase the likelihood that you can pay off your mortgage debt without any problems.

Please note: Due to the increased risks, private financial institutions and trust companies usually offer interest rate mortgages.

Interest Only Mortgage: Lighter Means More Expensive

In addition to the above, there are several reasons for the high cost of mortgages with only interest payments. Below we will describe the nuances of additional interest payments and increased rates for this mortgage program.

Additional interest paymentsIncreased interest rates
First of all, only interest is paid — the principal amount of the debt does not change.Interest payments don’t get you any closer to owning a property.To minimize the impact of refusal to pay, lenders use higher rates.Over time, the increased rates are very expensive for the borrower.

Please note: the interest-only type of mortgage carries risks not only for the borrower but also for the service provider.

However, in practice, there are not many cases where the borrower chooses a mortgage with only interest payments. Despite the attractiveness and seemingly low cost of such a mortgage in the long term, it is not profitable. Smart financial advisors advise you to avoid loans with such conditions (when you pay only for interest) at all costs. Even in terms of investments with the possibility of resale of the property, this is a very risky option.

Alternative Solutions for Borrowers

Interest-only mortgages offer low monthly payments, but this is not the only mortgage program with similar conditions. There are several more profitable and reliable ways to purchase a property and minimize the recurring costs of a loan.

Large Down Payment

The more money you make as an advance payment, the lower monthly payments will be required from you in the future. Perhaps you will be able to live with relatives or friends for some time to collect the amount of money necessary to fulfill these conditions.

Choosing a Longer Loan Period

The longer the total term of your mortgage, the lower your monthly payments. To obtain the maximum term (30 years), you must pay 1/5 of the value of the property. If you deposit less than 20%, you can count on a loan term of up to 25 years.

Choosing an Affordable Apartment or House

You may be able to reduce ambition and look at more budget housing options. The lower the loan amount, the lower the monthly payments. Subsequently, you will be able to issue more expensive options. To do this, you will draw up an agreement on the security of your property. 

There are rare cases when two families acquire one house for common use. This can be to invest in a promising property or for living in the same area. In this case, the amount of the mortgage debt is divided between all parties to the agreement. Monthly payments for each of the parties are also reduced.

Interest Only Mortgage: Afterword

The product described above is essentially a niche offer that you just need to keep in mind. This is a risky option that can help you buy a home or lead you into deep debt. To minimize risks and sensibly assess your capabilities, consult with a financial specialist of your bank.

Such consultations are free of charge and will help to minimize or avoid unpleasant consequences. At the same time, you can also learn how to get out of such a mortgage without loss and eventually become the owner of an apartment or house in Canada. 

Leave a comment

Your email address will not be published. Required fields are marked *