Michael Citrome
Province
A reverse mortgage lets you borrow against your home’s value interest-free until you sell it or die. — AP FILE
MONTREAL — Interest-only mortgages have been getting a lot of buzz in the U.S. of late and are now available in Canada.
The pitch is simple: An interest-only mortgage lets you buy the same house as you would with an ordinary mortgage, but the monthly payments are significantly lower. It frees up your income to spend elsewhere.
The interest-only mortgage is available here from Mortgage Intelligence Inc., a mortgage broker with offices across the country. But don’t pick out your penthouse loft just yet. There’s more to interest-only mortgages than meets the eye.
First, a little Mortgage 101.
A conventional home mortgage is just a loan using your house as collateral. A mortgage payment is made up of two elements — interest and principal. At the beginning of a conventional mortgage, your payments are mostly interest. At the end, they’re mostly principal. But in an interest-only mortgage, your payments do not include any principal. This means that, as long as your mortgage is interest-only, you’ll never get any closer to fully owning your home.
Interest-only mortgages have no amortization period. That’s where the problems start.
Let’s say you use an interest-only mortgage with a five-year term to buy more house than you can really afford. In five years, you’ll have to renegotiate your interest rate. If rates have gone up, so will your payments.
If real-estate prices hold steady or drop and you choose to sell, you may actually lose money.
Interest-only mortgages are an effective tool for buying more home than you could otherwise afford, especially if you know that in five years you’ll be making a lot more money than you do now. But for too many people, interest-only mortgages might seem like an opportunity to gamble on the housing market.
© The Vancouver Province 2005
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