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:
| Feature | HELOC | Interest-Only Mortgage |
|---|---|---|
| Payment | Interest only on drawn amount | Interest only on full amount |
| Rate | Variable (Prime+) | Could be fixed or variable |
| Maximum | 65% of home value | Varies |
| Principal | Optional | None during IO period |
HELOC as practical option:
- Many homeowners use HELOC for portion of borrowing
- Interest-only payments on HELOC portion
- Traditional mortgage on remainder
Discuss Your Options
Talk to our team about flexible payment structures that might work for your situation.
Who Uses Interest-Only or Similar Structures?
Investment Property Owners
Strategy:
- Maximize cash flow
- Interest is tax-deductible
- Equity comes from property appreciation
Risk: If property doesn't appreciate, no equity built
Self-Employed with Variable Income
Strategy:
- Lower base payments during lean periods
- Pay down principal during strong periods
- Flexibility for cash flow management
Bridge Situations
Strategy:
- Temporary need for lower payments
- Expecting income increase
- Short-term holding of property
The Risks of Interest-Only
No Equity Building
During interest-only period:
- Mortgage balance stays same
- No forced savings through principal payments
- Only equity comes from property appreciation
Payment Shock
When interest-only ends:
- Payments increase dramatically
- Must now pay P&I on full balance
- Shorter remaining amortization means higher payments
Example:
- $500,000 balance, 25-year amortization, 5%: ~$2,900/month
- Same balance, 20-year remaining (after 5-year IO): ~$3,300/month
Property Value Risk
If property values drop:
- You could owe more than property is worth
- No equity buffer from principal payments
- Difficult to sell or refinance
Interest-Only vs. Extended Amortization
| Feature | Interest-Only | 30-Year Amortization |
|---|---|---|
| Monthly payment | Lowest | Lower than 25-year |
| Equity building | None | Slow but steady |
| Available from | Private/limited | Many lenders |
| Risk level | Higher | Moderate |
| Principal at end of term | Same | Reduced |
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.
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