What is an interest only mortgage? Well… it’s exactly that, a mortgage with payments that are NOT amortized but rather interest only payments. It may not make sense why an interest only mortgage would exist or appeal to anyone, but read on and you’ll understand how a mortgage like this can be extremely useful for the right type of borrowers.
An interest only mortgage is really a short term solution to one of many problems; lack of cash flow, high interest debt, income tax arrears, power of sale, emergency renovations, etc. An interest only mortgage can be registered in the form of a first, second or sometimes a third mortgage, depending on the circumstances of your existing mortgage/mortgages. In all cases though, it must be registered as a mortgage (secured) as the lenders that offer these products are ‘equity lenders’. Most often, an interest only mortgage is registered second position (behind existing first mortgage) and is lent on a 1 year term to help clients consolidate debt or get the client out of a sticky situation such as power of sale or mortgage/tax arrears. You’re probably wondering, why interest only though? Why not amortize the mortgage the help pay off principal?
An interest only mortgage is usually lent by private lenders or MIC’s (mortgage investment corporations). Since the amounts are typically smaller amounts (typically $20,000, $30,000, $50,000, etc.), the lenders simplify the mortgage by making them interest only. By this method, your payments are always the same each month. After all, if you were to amortize such a small amount, you’ll notice that very little principal is paid throughout the term. Another reason for an interest only mortgage is it keeps your payments low! If you’re seeking a private interest only mortgage for any of the reason mentioned above, chances are it will be extremely helpful as a short term solution to obtain the money you need while at the same time keeping the payment as low and affordable as possible. Again, simplicity is the key as chances are a borrower who is looking for an interest only mortgage needs the money fast and is hoping to pay it off or consolidate it within 1-2 years. Consolidation will involve rolling this interest only mortgage into your existing first mortgage by way of a refinance (when the mortgage is due, or prior to the mortgage expiry).
Not to beat this topic to pulp, but remember that an interest only mortgage is a short term solution. The most important thing to keep in mind is that as easy and fast as it is to obtain this type of mortgage, the exit strategy is crucial as we do not want our client’s to carry an interest only mortgage for longer than they need to. Speak to us today to find out more about how a mortgage like this can help you in your situation. We’ll offer honest advice and share useful information that will help in your decision making.
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