Interest only mortgages are mortgage products where no portion of the regular interval payments is put towards the original principle. As such, one might make payments on an interest only mortgage loan for many years, but still owe the exact same amount as was originally borrowed.
Most traditional mortgages are amortized, meaning that ultimately after a set number of years, the original principle portion of the loan will be repaid the no mortgage shall remain. Technically, an interest only mortgage can be in the form of a first mortgage, second mortgage, secured line of credit , or virtually any other type of secured mortgage note.
Interest only mortgages will typically have a smaller payment by comparison to a loan at the same rate, and of the same amount, that is amortized.
In Canada, the vast majority of mortgage loans available to borrowers are amortized, both as a security precaution for the mortgage lender as well as a form of forced saving for the borrowers. By reducing the outstanding principle amount in addition to collecting the interest payments, a mortgage lender in Canada can help reduce their risk by ensuring that the value of the outstanding loan continues to shrink while the associated real estate continues to appreciate (hopefully!)
FACTOID: Historically, many of the first mortgage loans in the 19th and 20th century were interest only loans. It would be later in periods of great economic pain and recession that the economics of the day would realize the folly of building a financial system founded on â€œminimum paymentsâ€.
TIP: Secured lines of credit are the most common types of loans that have interest only payments. The borrower only pays interest on the amount he or she has taken from the line of credit, thus keeping the monthly cash flow requirements to a minimum. If the line of credit is at zero balance, no payments are required, and if an amount is outstanding, interest is paid on a regular basis on this amount.
Interest only mortgages can save cash flow per month and be less of a financial burden for those clients who may be on a tight budget. For example, obtaining an interest-only second mortgage to pay off the many unsecured credit card debts you have, will enable you to eliminate your debt, have only one low interest-only payment per month, and re-establish your credit to bring yourself back on track.
An interest only mortgage is well-suited to an individual who has equity in their property, but low cash flow per month. Excellent examples of typical borrowers would be those on a fixed income pension or annuity payment such as retired and disabled applicants.
Another niche that benefits from interest only payments are Canada’s self-employed, commission, and seasonal workers that often endure periods of limited cash flow and then large one-time payments from dividends, management fees, and large commissions. In these examples, borrowers would benefit from minimal payments throughout their slow periods, and can take advantage of the pre-payment privileges to catch up on their principle repayments and then some!
Contact Canada’s mortgage experts today for a complimentary consultation on interest only mortgages. Call Us Today at 1 888 465-1432.