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:
Discuss Your OptionsTalk to our team about flexible payment structures that might work for your situation. Who Uses Interest-Only or Similar Structures?Investment Property OwnersStrategy:
Risk: If property doesn't appreciate, no equity built Self-Employed with Variable IncomeStrategy:
Bridge SituationsStrategy:
The Risks of Interest-OnlyNo Equity BuildingDuring interest-only period:
Payment ShockWhen interest-only ends:
Example:
Property Value RiskIf property values drop:
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.
Explore Flexible Options
Our team can help you find payment structures that work for your situation.
