November 20, 2018 nkad3

Is An Interest Only Mortgage Right For You?

An interest only mortgage is right for you if it needs to be right for you. Yes, I agree that this sounds very wishy washy, but let me explain further. An interest only mortgage is exactly that… a mortgage that entails interest only payments. This is very different than an amortized mortgage. With interest only mortgages, your monthly payment goes entirely to paying the interest (as set out in your term/conditions) while nothing goes toward the principal.  This raises 2 questions:

  1. Why would any mortgage be interest only to begin with? The truth is, having an interest only mortgage is actually the most effective way of keeping your payment as low as possible (pretty much as low as you can go) – and if keeping payments as low as possible is a priority, this is what needs to be done to help cash flow.
  2. Why would anyone want an interest only mortgage if it means you’ll never pay down principal? Well no one really wants an interest only mortgage (or at least it’s definitely not a first choice if other options are available), but sometimes it’s necessary and the only viable option given certain circumstances.

A few common reasons we’ve arranged interest only mortgages for clients are; notice/power of sale, debt consolidation, paying off mortgage arrears, time sensitive funds needed, cannot qualify through traditional A or B lending options, unable to prove income, existing mortgage lender will not advance the needed funds, etc. Let me state on record that we do not arrange interest only mortgages for clients as a long term strategy. I express this to all of my clients seeking out such a type of mortgage. Given the nature of interest only mortgages (higher rates and not amortized) they are very much meant to solve a problem as fast as possible with the intention of paying off/consolidating within the near future. Typically, clients are able to pay off/consolidate the mortgage within 1-2 years of taking it out, and this is the plan we set up for our clients.

So let’s revisit the major question – is an interest only mortgage right for you? To help answer that question, I’ve composed a list of many questions below. If your answer to many of these questions is ‘Yes”, then an interest mortgage might indeed help you:

  • Is your need for funds very time sensitive?
  • Has your existing bank (mortgage holder) refused to extend additional credit?
  • Are you in arrears with your current mortgage? Do you owe property taxes? Do you owe CRA back taxes? Do you have a lot of outstanding unsecured debt? Are you bound to a purchase agreement but cannot find financing through an institution?
  • Have your existing bank issues a notice of sale (or executed on power of sale proceedings)?
  • Is your current mortgage within term with an expected maturity of 1-2 years from this date? OR is your mortgage currently in a closed term?
  • Are you having a hard time proving income to qualify your request through a bank?
  • Are you looking for a quick and effortless short term mortgage to prepare yourself for the sale of your home?

These aren’t loaded questions. The truth is, based on our many years of experience; these are some of the most common needs for interest only mortgages. We’ve underwritten hundreds of case specific requests. An interest only mortgage, if not properly explained with the necessary guidance, can seem like a move made out of desperation. It truly bothers me when clients explain their previous experiences with other brokerages as such. I disagree that this should be the end result, in fact, I truly believe with the right plan put into motion; we can strategize with you to use the interest only mortgage to solve your problem today with an effective exit strategy for the near future. Most importantly, if an interest only mortgage is not the only option for you, we’ll tell you.

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