Interest only mortgages are loans that do not contain the principal when payments are made. In Ontario Interest only payments are an option of an Interest only mortgage. For example, suppose a borrower takes out a mortgage loan amount of $200,000 at an interest rate of 6.5% scheduled to be paid over a 30 year period; amortized monthly payments would be $1,254. This amount comprises both principal and interest. The interest only monthly payments would be $1,083. From this illustration, it is clear that this option reduces a client’s payments by about $171 on a monthly basis.
Many lenders do not have an option that allows for interest only payments to be made during the term of the loan. Usually the loan is amortized during the term of the loan or mortgage.
The reason that some clients may want an interest only mortgage is to keep their monthly payments as low as possible. This could be for various reasons but commonly it is because of financial hardship or rebuilding after job loss or loss of income.
Computing interest only payments is not very difficult. Most brokers, lenders or even lawyers have the interest, only payments calculator. However, if you want to do it yourself, then you can follow these steps;
(i) Take the unpaid loan balance and multiply it by the interest rate. This will give you your annual amount of interest.
(ii) Divide that value by 12 months. This will give you your equal monthly interest payments. That is how we got a value of $1,083 in the first example.
Not all lenders offer interest only payments. Depending on the qualification process, some lenders will go as high as 35 years amortization in order to help keep the monthly payment down, allowing you to pay the minimum amount of principal. This kind of mortgage arrangement may be recommended for first time home buyers who are not accustomed to making mortgage payments. This may give them a cushion for the first few years until they get used to it.
It is also ideal for people looking for a second mortgage to consolidate debt or who do not have a steady income, such as those who rely on commissions instead of a basic salary. Interest only payments are not recommended as a long term option as the principal will have to be paid off at some point.
Sometimes developers will also take out this kind of payment option as well as they want to keep their costs as low as possible while they develop a new project.
Lenders may increase the interest rates on Interest only payments. However, this should not deter anyone from seeking out this kind of arrangement because the benefits associated with it often outweigh the disadvantages.
In Ontario interest only payments for a mortgage can be a great option depending on the situation that you may find yourself in.