Interest-Only Mortgages in Canada: What You Need to Know

Interest-only mortgages work differently in Canada than in other countries. While pure interest-only residential mortgages are rare, alternatives exist. Here's what you need to know if you're looking for lower payment flexibility.

What Is an Interest-Only Mortgage?

Definition:

• Pay only interest for a set period
• No principal reduction
• Lower monthly payments during interest-only period
• Balance remains unchanged

After interest-only period:

• Must pay principal + interest
• Payments increase significantly
• May need to refinance

Availability in Canada

Traditional Interest-Only Mortgages

Reality: Very limited availability from residential lenders

Why?

• OSFI guidelines discourage
• Higher risk for lenders
• Regulatory concerns

HELOC as Alternative

Home Equity Lines of Credit function similarly:

Extended amortization alternative:

• Available from many lenders
• Still builds equity (slowly)
• More mainstream option
• Maximum 30 years for uninsured

How to Get Close to Interest-Only

Readvanceable Mortgage with HELOC

Structure:

• Traditional mortgage for main portion
• HELOC for additional portion
• Pay P&I on mortgage, interest-only on HELOC

Private Lenders

May offer:

• True interest-only terms
• Higher rates (8-15%+)
• Larger down payment required
• Short terms (1-2 years)

B Lenders

Some offer:

• Extended amortization (up to 40 years)
• Effectively very low principal payments
• Higher rates than A-lenders

FAQ

Q: Can I get an interest-only mortgage for my primary residence?
A: Very difficult through traditional lenders. A HELOC or private lending might achieve similar results but with different terms and higher rates.

Q: Is interest-only ever a good idea?
A: For sophisticated investors with specific strategies, it can make sense. For primary residences with standard homeowners, the risks usually outweigh benefits.

Q: What happens at the end of the interest-only period?
A: You typically must begin paying principal + interest, or refinance. If you can't afford the higher payments, you may need to sell.

Q: Are interest-only payments tax-deductible?
A: Only if the borrowed funds are used for investment purposes. Interest on your primary residence is not deductible.

Q: What's the maximum interest-only period?
A: Varies by lender and product. HELOCs have no set term. Private loans often 1-3 years.

What's Next

If you're looking for payment flexibility, there may be options beyond traditional interest-only. Talk to our team about structures that might work for your specific situation and goals.