For borrowers who need lower payments for a set period
Interest-only payments keep your monthly cost down, but the balance stays where it is. The plan to repay it is the whole point.
With an interest-only payment you pay the interest each month and none of the principal. That can ease cash flow for investors, for short-term loans and for some equity loans. It also means you owe the same amount at the end. Here is when it is used, what it risks and how to plan the exit.
You've started an application.
Saves as you go · No credit check · A licensed mortgage professional follows up
1An interest-only mortgage or loan requires only the interest each month. Nothing goes toward the principal, so the balance does not go down unless you make extra payments.
2It is common in private and short-term loans, second mortgages, home equity lines of credit and some investment property financing. Most banks do not offer it on regular home purchases.
3The main risk is the end of the term. The full balance is due, so you need a sale, a refinance or savings ready. If the home value falls or your income changes, refinancing may be harder.
4Costs still apply: interest, lender and broker fees, legal and appraisal. Any approval is subject to the lender, and terms differ widely.
Get ready
What lenders will ask you for
Government photo ID for every borrower
Property tax bill, proof of home insurance and your current mortgage statement
Details of other debts secured on the property
Income evidence you can show, or for an investment property, the lease and rent details
A written plan for how the balance will be repaid or refinanced
Your options
Which kind of lender fits you
Option 1
Interest-only second mortgage or private loan
Lower monthly cost during a short term, with the balance due at the end. Plan the exit before you sign.
Option 2
Interest-only HELOC
Many lines of credit require only interest on what you use. Balances can linger if you never pay down principal.
Option 3
Regular amortizing mortgage
Higher payments, but the balance falls each month. Often cheaper over the long run.
Option 4
Partial interest-only or a payment you choose
Some lenders allow extra principal payments at any time, so you can pay interest-only by default and pay down when cash allows.
Avoid these
Common mistakes
!Treating lower payments as lower cost. You still owe the same balance at the end, and often at a higher rate.
!Having no exit plan when the term ends.
!Counting on the home value rising. Prices can fall, which can make refinancing harder.
!Ignoring prepayment rules. Ask whether you can make extra principal payments and whether any penalty applies.
Take action
Your first steps
1Write down why you want interest-only payments and for how long.
2Decide how the balance will be repaid: sale, refinance, savings or a switch to regular payments.
3Gather ID, your mortgage statement, tax bill and income or rent evidence.
4Start the intake so a broker can compare lenders that offer interest-only terms.
5Review the written costs and renewal terms, and get independent legal advice before you sign.
The intake
What your application will ask
Your online application goes one topic at a time and saves every answer and document as you go, so you can stop and come back. It never runs a credit check, and a licensed mortgage professional reviews it and follows up.
For interest-only borrowers
What is the purpose of the loan (investment, short-term need, equity borrowing), and how long do you need interest-only payments?
What is the property worth, where is it, and what is owed on it today?
How will the balance be repaid when the term ends?
What income or rent can you show, and how comfortable is your budget with the payment?
Plus the basics everyone answers 13
Your full name, email, mobile number and the best time to call.
The city you live in, and whether you are a Canadian citizen, permanent resident, or other status.
Are you applying alone or with someone else? If with someone, their name and how you are related.
Your goal: buy, refinance, renew, take out equity, or consolidate debt?
The property type (house, condo, multi-unit) and the city it is in.
Will you live in it, rent it out, or both?
The purchase price or estimated value, and your target closing or renewal date.
Your down payment or available equity, and where it comes from (savings, RRSP/FHSA, a gift, sale of another property).
Your approximate yearly household income before tax.
Your monthly debt payments: car loans, credit cards, lines of credit, student loans, support payments.
Your own estimate of your credit score: excellent, good, fair, poor, or not sure.
In the last 7 years, any bankruptcy, consumer proposal, collections, or missed mortgage payments?
May the broker contact you? (A credit check is only ever run later, with your separate written consent.)
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Answers
Questions people ask
What is an interest-only mortgage?
A loan where your payment covers only the interest. The principal stays the same unless you make extra payments, and the balance is due at the end of the term.
Who uses interest-only payments?
Commonly real estate investors, borrowers with short-term private loans or second mortgages, and people using a home equity line of credit. Banks rarely offer it on a regular home purchase.
What are the risks?
The balance does not shrink, the payment may rise at renewal, and you need a plan to repay or refinance. If home values drop or your income changes, that plan can become harder.
Can I make extra payments toward the principal?
Often, yes, but terms differ. Ask whether there is a limit, a fee or a penalty on extra payments before you sign.
What does it cost?
Interest, plus typically a lender fee, a broker fee, legal costs and an appraisal. A lower payment does not mean a lower total cost.
Does starting the intake affect my credit?
No. It is only questions. A credit check, if needed, comes later and only with your permission.
General information, not mortgage, legal or tax advice. Lender rules change and every application is reviewed on its own facts. Your application and documents are stored privately and go only to a licensed mortgage professional at Top Mortgages Inc; they are never sold, and no credit check is run without your separate written consent.