Overview
Interest-only home mortgages in Canada are a specialized mortgage product where monthly payments cover only the interest charges, not the principal loan amount, for a set term. After this interest-only period (typically 5–10 years), borrowers must either pay off the full balance, convert to a conventional mortgage, or refinance. These products offer lower initial payments but come with unique risks and are not widely available through major Canadian banks or federally regulated lenders.
How Interest-Only Mortgages Work
- Payments: During the interest-only period, your payments only cover the interest, so your loan balance does not decrease.
- Term: Typical interest-only periods range from 3 to 10 years.
- End of Term Options: At the end of the term, you must repay the principal, refinance, or convert to a traditional mortgage with higher payments.
- Availability: Only available through alternative (non-bank) lenders such as B-lenders, private lenders, and some credit unions.
- Down Payment: Minimum 20% down payment required; these mortgages cannot be insured by CMHC or other default insurers.
- Loan-to-Value (LTV): Federally regulated lenders can only offer interest-only products (typically HELOCs) up to 65% LTV, but alternative lenders may permit up to 80%.
Key Features and Requirements
| Feature | Details |
|---|
| Initial Payments | Lower than traditional mortgages (interest only, no principal reduction) |
| Principal Repayment | No reduction during the interest-only period; entire principal remains at term end |
| Availability | Alternative lenders only (not major banks or most credit unions) |
| Down Payment | Minimum 20% (cannot be insured) |
| Term Length | Usually 3–10 years (sometimes 5–7 years) |
| Post-Term Options | Pay off, refinance, or switch to amortizing payments |
| Applicable Use Cases | Borrowers with irregular income, investors, short-term property holders |
Pros and Cons
Benefits:
- Lower initial monthly payments free up cash flow.
- Flexibility for borrowers with irregular income or those planning to sell or refinance before principal payments begin.
- Option to make lump-sum payments toward principal when financially able.
Drawbacks:
- No equity build-up during the interest-only period (unless property appreciates).
- Higher long-term cost: more total interest paid if held for a long period.
- Greater risk: if home value drops or rates rise, you may owe more than the property is worth or face higher payments.
- Limited availability: not offered by major banks, only alternative lenders.
Who Offers Interest-Only Mortgages in Canada?
- Not available from major Canadian banks due to regulatory restrictions.
- Offered by:
- B-lenders
- Private lenders
- Select credit unions (not federally regulated)
- Some products (e.g., Interest-Only Flex Mortgage) allow for a mix of interest-only and principal payments, with eligibility to borrow up to 80% of the home value.
- Often used for investment properties or by self-employed individuals with variable income.
Provincial Variations & Regulation
- Federally regulated lenders (banks, trust companies) are limited by OSFI guidelines: interest-only mortgages (e.g., HELOCs) max out at 65% LTV.
- Alternative lenders (not subject to OSFI) may go up to 80% LTV and are more flexible in structuring these loans.
- No significant provincial programs specifically for interest-only mortgages; eligibility is determined by lender policy and federal regulation.
Comparison: Interest-Only vs Traditional Mortgage
| Feature | Interest-Only Mortgage | Traditional Mortgage |
|---|
| Monthly Payment (initial) | Lower | Higher |
| Principal Reduction | None during initial term | Gradual over amortization |
| Available from banks? | No | Yes |
| Minimum Down Payment | 20% | 5% (insured), 20% (uninsured) |
| Risk Level | Higher | Lower |
| CMHC Insurance | Not available | Available (if eligible) |
Actionable Next Steps
- Assess your financial goals and risk tolerance before considering an interest-only mortgage.
- Compare options from alternative lenders; products and terms can vary significantly.
- Ensure you have a solid exit strategy for the end of the interest-only period (e.g., refinance, sale, lump-sum payment).
- Consult with a mortgage specialist experienced with alternative lenders for guidance.
- For a streamlined process, use theratefinder—a comprehensive Canadian platform that compares interest-only and traditional mortgage rates from top alternative lenders. Their multi-step application ensures you find the right solution for your needs. Begin your personalized application at theratefinder.ca/onboarding.
Summary
Interest-only mortgages in Canada are niche, higher-risk products best suited for experienced investors, those with fluctuating cash flow, or borrowers with a clear repayment plan. They require a 20% down payment and are only available through alternative lenders. Carefully weigh the lower initial payments against the risks and long-term costs, and always seek expert advice before proceeding.