Interest Only Mortgages in Ontario.
What is an Interest Only Mortgage?
An interest only mortgage consists of mortgage payments that based entirely on interest. In other words, your principal balance will not decrease during the life of the interest only mortgage. In the case of a traditional amortized mortgage, your payments will consist of both principal and interest. Amortization simply refers to the act of a debt repayment over so many scheduled instalments until the loan is paid in full. For example if you were to take out a first mortgage for $500,000 and the loan is amortized over 25 years, your mortgage will paid off in 25 years.
The Main Benefit
In our opinion the biggest advantage of an interest only mortgage is the smaller payment. Interest only mortgage payments do not include portions of principal so naturally your payment will be smaller. For instance, the mortgage payment on a $500,000 mortgage at 3.99%, amortized over 20 years is $3,018.65. Compared to a first mortgage of $500,000, at 6.99%, interest only, where the monthly payment is $2,912.50. Although the private mortgage rate is about 40% greater than the bank rate, the payments are basically the same. Now let’s actually compare the difference between the amortized payment and the interest only payment on $500,000. Interestingly enough, the interest only payment of $2,097 is significantly less than the amortized $2,912.50 a month. Let’s go the step further and use a From a cash-flow standpoint, an interest only mortgage might make tons of sense. Over the span of a 12 month term, that adds up to
Something to Consider
It’s important to keep in mind that your interest only mortgage payment, well, only pays the interest. This means that the principal balance of your mortgage isn’t even touched. If you plan to keep the mortgage and property for many years time, an interest only mortgage isn’t exactly sustainable for the simple reason being that you aren’t paying down your mortgage. As mentioned earlier however, you may opt to stay with an interest only mortgage due to the affordability factory. You also want to keep in mind that most banks do not offer interest only mortgages. This means that you must prepare or at least acknowledge that in order to refinance to a bank, your will be amortized. A combination of a lower interest rate and a longer amortization schedule might close the gap between an interest only private mortgage payment. If however the low bank rate and extended amortization still place you out of budget, you should consider down-sizing your home and assuming a smaller mortgage.
An interest only mortgage can be a simplistic way to access money with affordable payments for a private first, second, or third mortgage using your home equity In addition, we provide prepaid interest mortgages that allow you to not make payments for up to 12 months. Contact us anytime for a friendly discussion and learn if you qualify for an interest only mortgage.