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Could an Interest Only Mortgage be the right choice for you?

  • By Sabeena Bubber
  • •
  • 31 Mar, 2020
Relatively self-explanatory, an interest-only mortgage is one where your entire mortgage payment goes to interest and does not pay down the principal mortgage amount at all. So at the end of your term, you will owe the same amount as when you got your mortgage.

So you might be asking yourself, what are the advantages? Well, an interest-only mortgage frees up your cash flow. As you’re not responsible for paying down the principal balance, you can expect a lower mortgage payment.

Here’s an example. On a $400k mortgage balance, over 25 years, at a 4% interest rate, the monthly repayment on an amortized mortgage would be roughly $1902/mth. However, as an interest-only mortgage, the payment is $1,321/mth, providing you with an extra $580 in monthly cash flow.

If you’re planning for your retirement and gaining cash flow is essential, an interest-only mortgage might be worth considering.

The money you save by not paying down the principal of your mortgage can be used however you like. It could be used to pay off higher interest debts like credit cards, unsecured line of credits, or any other high-interest loans. Or it could be used to offset the increased cost of maintaining your home through retirement; property taxes certainly aren’t going down anytime soon. It could even be used to maintain your current lifestyle.

Regardless of what you decide to do with the extra cash, the choice is yours.

As the qualifications for an interest-only mortgage require you to have an income, good credit, and home equity, not everyone planning for their retirement; or those who have recently retired, will qualify.

When you compare an interest-only mortgage to a reverse mortgage; where there are no payments required and your balance grows instead of staying the same, an interest-only mortgage could save you money as the rates are typically lower on an interest-only mortgage. However, as there are no required payments on a reverse mortgage, although it is a little more costly, it's the ultimate cash flow option.

As a Lifestyle Mortgage Expert, it is my job to outline the many mortgage options you have as you plan your mortgage through retirement. An interest-only mortgage is just that, one of the many choices you have available to you.

If you would like to discuss all the mortgage options available to you; including an interest-only mortgage, please contact me anytime!

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