interest mortgage only

Jan 4, 2021 | Mortgages | 0 comments

How do mortgage brokers get paid?

Mortgages | 0 comments

Interest-only mortgages were introduced in the beginning of 2018. 

What is an interest-only mortgage? 

Interest-only mortgages require you to make only interest payments during the term of the mortgage.  This is a great option to minimize the monthly payment and balance your monthly cash flow if you’re worried about the cost of your mortgage payments after a move.

Despite being great for monthly cash flow, these interest-only mortgages can come with some “fine print,” but that doesn’t mean it’s not the best course of action for a homebuyer.  Everyone’s situation is unique, it’s important to check with your broker and put together some pros and cons to figure out of the interest only mortage product are the best fit for you.

Here is everything you need to know about how mortgage brokers are compensated

Mortgage brokers are paid by a commission from the lenders. Major banks, Credit Unions and Monoline lenders all pay a very similar referral fee to the broker.  The broker will be paid a certain percentage of the loan amount by the lender when they connect that lender to a borrower. 

Should you get a mortgage through a bank or a broker?

It is always a good idea to compare rates and service of mortgage brokers and mortgage providers – this will help you get a better understanding on what’s right for you and what is available.

There are some differences between obtaining a mortgage through a broker vs a lender.  For example, not all brokers work with all lenders.  Most mortgage providers, or banks, do offer their mortgages through brokers, but some sell mortgages directly – RBC, CIBC and BMO are the banks that do not sell mortgages through mortgage brokers.

A broker will compare rates between multiple lenders and will offer rates not available on the retail market. They may be able to negotiate a lower rate for you and recommend a range of mortgage terms.

interest on mortgage

What percentage of the deal is paid to the broker? 

Commissions vary between each broker and each bank.  A range might be between 0.5% to 1.2% of the full mortgage amount.  The lender, the type of mortgage term and type of mortgage product will determine the exact percentage.

Normally, the lender will pay upfront commission to the broker, however, there are other types of commissions lenders may pay as well.

Trailer Fees 

These fees are paid to brokers over a certain time, typically for as long as the borrower signs their mortgage contract.  This is normally done in exchange for a lower commission on the front end.

Renewal Fees

Renewal fees are paid to the original broker when the borrower renews their mortgage with a lender.  However, if you were renewing with a new lender; your broker would still get paid.  It is always a good idea to compare rates at renewal time irrespective of how your broker will get paid.

Lines of Credit

 Clients with 35% down payment can obtain a Home Equity Line of Credit.  The minimum required payment on your HELOC (home equity line of credit) is just the interest portion.  Some lines of credit in Calgary have an interest rate of Current Interest Rates + (Bank Prime Rate + 0.50%).

Fixed Term Interest only mortgages – Fixed term interest only mortgages are offered at a very select number of lenders.  This product is use primarily to help clients balance their monthly cashflow and minimize their mortgage payments.  This can be helpful after a divorce or a loss of family income.  During the COVID 19 pandemic, these types of mortgages have been attractive to clients that have suffered long term lay offs.

Alternative Lending – periodically, a client’s mortgage doesn’t fit in the “triple A lending” box.  In these cases, we need to use alternative or private lending to make the deal work.  Because their interest rates are much higher, private lenders only charge interest on their loans.  In this case, it helps the client mitigate what would otherwise be a very, very high mortgage payment.

Is It smart to go with an interest only mortgage?

It depends on how you want to look at it.  The idea of having that extra cash flow every month does sound appealing, but bear in mind that you’ll still owe the full amount of the loan you borrowed at the end of your mortgage term.  But, if this is a way to temporarily balance or monthly cash flow, or if an alternative mortgage is the only way to get into the Real Estate Market, this might be the perfect product type for you.   

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