When you're watching mortgage payments fly out of your bank account every month, it's easy to fantasize about what you'd do if you could skip the principal and just pay the interest without facing any negative repercussions. Well, those dreams can become realities with Interest Only Mortgages. Here's what you need to know about them
What is an Interest-Only Mortgage?
Interest-only mortgages are exactly what the name says on the tin. They're a type of mortgage that allows homeowners to pay nothing besides interest every month. Not indefinitely, of course, but usually over a period of a few years.
What this means in practical terms is that the principal amount on the mortgage never goes down during the interest-free mortgage period.
What Are Interest-Only Mortgages Used For?
On paper, interest-only mortgages may seem rather counterintuitive. Sure, you're paying less per month. But at the same time, the amount you owe on your mortgage isn't actually being paid down - that said, with different kinds of mortgages having different prices, this type of mortgage has one primary purpose: to lower your monthly payments.
And to be fair, homeowners can use those savings for a variety of different purposes ranging from debt repayment to renovation projects and stock investing.
It may not make sense initially, but is a surprisingly powerful option that's available to homeowners.
The Advantages of an Interest-Only Mortgage
Hands down the biggest benefit of an interest-only mortgage is the financial flexibility that it offers to homeowners. As we stated before, this mortgage's primary function is to reduce monthly costs.
And depending on the particulars, there are sound financial reasons to do exactly that. Whether you're an aspiring entrepreneur looking for cash to bootstrap your business or you're growing a nest egg going into your retirement years, an interest-only mortgage makes it possible to financially maneuver in ways that other loan options may not.
The Disadvantages of an Interest-Only Mortgage
All of that being said, the problems that come with interest-only mortgages can be summed up in one word: risk.
Homeowners who want to use the extra funds for investing stand to gain quite a bit from going interest-free for obvious reasons. But if the plan is to beef up an RRSP, a lot depends on how those investments pan out in the stock market. With the stock market being as unpredictable as it is, one downturn in your picks could make the move to go interest-only unprofitable.
This is why opting for an interest-only mortgage is a move that requires a lot of forethought and financial discipline.
Another downside of interest-only mortgages is that when the terms end, homeowners can see payments shoot up to the tune of several hundred dollars in a single month. And even if you're financially secure enough to absorb the costs, that type of sudden change can still have a profound impact on a household budget.
Should You Go For an Interest-Only Mortgage?
At the end of the day, interest-only mortgages can serve a positive purpose to a particular subset of people: those who know how to make hay with the additional cash.
Business owners or would-be entrepreneurs and folks who are looking to reduce overall debt are all somewhere on that list. Workers on parental leave and seasonal workers are suitable candidates, too. As you can imagine, the set of homeowners who would likely benefit from going interest-only is rather small. Fortunately, just because interest-only mortgages may not work for you doesn't mean you're out for the count. A quick search online can bring up many companies that can help you shop for the right option.
Every once in a while, whether while browsing or while watching TV, you find a financial product that is unlike anything you've ever seen before. If you're used to traditional mortgages that you make principal payments on, chances are an interest-only mortgage may fall under this category for you.
It turns out that while interest-only mortgages may be harder to justify if personal loans and lines of credit are on the table, there are still people who can benefit from going this route. When it comes to flexible financing, an interest-only mortgage is a creative option that just might work.