Individuals will usually pay interest from 5-7 years. What is an Interest-only Mortgage?Īn interest-only (IO) mortgage involves the borrower paying only the interest on the loan for a specific amount of time. One option that people have is an interest only mortgage. Therefore, borrowers need to consider all options, so they can save as much money as possible. Buying a new home is such an exciting experience however, it is a costly investment. So, if you apply for a standard P+I mortgage the bank will test whether you can pay the loan back over 30 years.īut, if you apply to go interest-only, you will have 5 years’ interest-only repayments and then 25 years of principal and interest.Many people across Canada are looking to purchase a new home.
So really, the phrase “interest-only mortgage” is a bit of a misnomer because it’s not an interest-only mortgage, it’s an interest-only period. This means, at the end of that 5-year period, your loan will move to principal and interest by default. When you apply for an interest-only mortgage, you’re generally approved for a 30-year principal and interest mortgage with a 5-year interest-only period tacked on the front. An investor can often borrow slightly less than they could if taking out a standard P+I loan. It’s common for investors to initially think they’ll be able to borrow more on an interest-only mortgage, since their costs are lower. So, if you have one, make that your focus.Ĭan I borrow more if I go on interest-only? The aim of the game is to pay down your debt on your owner-occupier. That creates an incentive to pay back personal debt first. If the interest on your investment mortgage is still tax deductible, then your investment debt has a tax benefit, whereas your owner-occupier mortgage does not. So paying down personal debt frees up useable equity, whereas paying investment debt may not.ģ) It can help you save on tax. This isn’t available for many investment properties, because they are highly leveraged. Most investors borrow against their main home to fund the deposit for an investment property. If worst comes to worst you can always sell your investment property to pay back the mortgage, but you may not want to sell your main home if you get into a tricky financial situation.Ģ) It can help you grow your portfolio more quickly. They’ll then use that money to pay down their own personal debt more aggressively.ġ) It helps to protect your main home. In this case, the borrower will take the money they would have used to pay down their investment mortgage. Similarly, if you have an owner-occupier mortgage, it is generally better to pay this down first rather than paying back debt on your own home and your investment property at the same time. This means the total amount of interest you pay goes up in a straight line. Why? Because you are only paying interest the size of your loan never decreases. These mortgages are typically set to a 30-year term, and interest rates fluctuate depending on how long the borrower wants to fix the interest rate for.Īs stated above, interest-only loans are a temporary loan structure where the borrower only pays the interest on the loan and doesn’t pay any of the principal mortgage back.Īs ironic as it may sound, investors who take out interest-only loans do end up paying more interest over time. Principal and interest loans are most common with owner-occupiers and repayments are both the interest on the loan (the cost of borrowing money from the bank) and a portion of the actual money you loaned from the bank. In the big wide world there are two types of mortgages: principal and interest (P+I) and interest-only loan. What’s the difference between an interest-only and a principal and interest loan?
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