Relatively self-explanatory, an interest-only mortgage is one in which your entire mortgage payment goes to interest and does not pay down the principal mortgage amount at all. So at the end of your term, you will owe the same amount as when you got your mortgage.
So you might be asking yourself, if you have to pay the principal at the end of the term, what’s the point?
Well, an interest-only mortgage frees up your cash flow. As you’re not responsible for paying down the principal balance, you have a lower mortgage payment. The interest-only mortgage really shines as a management tool for rental properties, where cash-flow is king. Here’s an example.
Let’s say you have a $400,000 mortgage balance. It’s spread over 25 years, and the interest rate is 4%. Your monthly repayment on an amortized mortgage would be roughly $1,902. If it was an interest-only mortgage, the monthly payment would be only $1,321, freeing up nearly $60 extra in monthly cash flow.
The money you save by not paying down the principal of your mortgage can be used however you like. You could pay off higher-interest debts, for example, such as credit cards or unsecured line of credits. Or if you have a fixed income, an interest-only mortgage may offset the increased cost of maintaining your home through retirement.
Now, while an interest-only mortgage is designed to give you increased flexibility, don’t be alarmed if that flexibility comes at a price. Interest rates for an interest-only mortgage are slightly higher than standard mortgage rates.
The advantage of working with an independent mortgage professional, compared to the bank, is that we have access to multiple lending solutions and mortgage products. The interest-only mortgage isn’t right for everyone, but it stands as an example of one of the many mortgage products you have available through a mortgage broker.
If you want to discuss your financial situation and what mortgage products would be best for you—even interest-only mortgages—please contact us anytime!