interest mortgage only

Jan 20, 2021 | Mortgages | 0 comments

What is an Interest only Mortgage?

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.

What makes an interest-only mortgage different?

A traditional mortgage requires that you pay BOTH interest and principal as you repay your mortgage each month.  And interest only mortgage scraps the principal amount and just requires that the interest portion be paid. 

At the end of the term of your interest only mortgage, you will still owe the exact same amount that you owed at the beginning of the mortgage term…because again, you’re only paying the interest. 

The payment terms and conditions of an interest-only mortgage will differ depending on the lender.  Some of them are fully open, like a line of credit, and others include payout penalties.  Check with your broker so that you fully understand the penalties (or lack there of), associated with your specific mortgage.

What types of interest only Mortgages exist in Calgary?

interest on mortgage

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.  Most lines of credit in Calgary have an interest rate of 2.95% (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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