TL;DR
They are best used in narrow scenarios with a defined exit strategy. If your plan is long-term owner-occupied stability, a standard amortizing mortgage is often the safer default.
What "interest-only mortgage" usually means in Canada
In Canadian borrowing conversations, "interest-only" can refer to different products. Some are mortgage terms from alternative or private lenders. Others are revolving home-equity facilities where the minimum payment can be interest-only.
Before comparing rates, confirm the exact structure you are being offered, how long the interest-only period lasts, and what happens when it ends.
Where interest-only structures show up most often
| Structure | Where you usually see it | Core upside | Main risk |
|---|---|---|---|
| Alternative or private mortgage with interest-only terms | Files with short timelines, income complexity, or credit recovery | Lower monthly carrying cost during the term | No principal reduction unless you prepay intentionally |
| HELOC-style servicing | Equity-based borrowing and flexible cash-flow planning | Payment flexibility and revolving access | Variable-rate exposure and balance drift if undisciplined |
| Short-term bridge scenarios | Interim funding windows tied to a clear event | Protects timing when liquidity is temporary | Timeline slippage can increase total carry cost quickly |
Interest-only payment math: a simple reality check
Use this as a quick planning anchor. On a $600,000 balance at 6.00%, pure interest-only servicing is about $3,000 per month (600,000 * 0.06 / 12).
At the same balance and rate over a 30-year amortization, the payment is about $3,597 per month. The lower interest-only payment can help short-term cash flow, but the tradeoff is slower or zero principal progress unless you add extra payments.
Who this can fit, and who should avoid it
Usually a fit
- Borrowers with a defined short horizon and a documented refinance or sale plan.
- Investors prioritizing near-term cash-flow management with strict risk controls.
- Borrowers solving a temporary constraint while actively working toward prime qualification.
Usually not a fit
- Households that need long-term payment certainty and steady principal reduction.
- Borrowers without a written exit plan, deadline, and backup liquidity buffer.
- Anyone choosing interest-only purely to "qualify now" without scenario testing rate and renewal risk.
Decision traps that create expensive outcomes
| Mental model | Common mistake | Pragmatic control |
|---|---|---|
| Present bias | Optimizing this month's payment while ignoring long-term balance drag | Set a scheduled principal prepayment amount from month one |
| Anchoring bias | Judging affordability from interest-only payment alone | Underwrite both interest-only and full-amortizing scenarios before committing |
| Status-quo bias | Keeping an old plan after market conditions change | Re-evaluate strategy at each rate decision and 120 days before maturity |
| Planning fallacy | Assuming refinance or sale timing will always be perfect | Build a contingency path and liquidity reserve before closing |
Interest-only vs safer alternatives
| Option | Best use case | Key tradeoff | Next step |
|---|---|---|---|
| Interest-only structure | Short-term payment relief with a defined exit event | Principal does not decline unless you force it | Write the refinance/sale trigger before signing |
| Amortizing fixed or variable mortgage | Longer-horizon owner-occupied planning | Higher monthly payment, faster equity build | Model payment stability and break-cost scenarios |
| HELOC strategy | Flexible equity access with disciplined repayment behavior | Variable-rate sensitivity and utilization risk | Stress-test prime-rate increases before drawdown |
| Second or private mortgage (short term) | Temporary financing when conventional options are blocked | Higher total borrowing cost | Set a hard deadline to return to prime lending |
Pre-sign checklist for interest-only deals
- Confirm exactly when interest-only terms end and what payment structure follows.
- Model total cost under base-case and stress-case rates for your real hold period.
- Set your principal reduction plan in writing, including monthly and annual targets.
- Define the exit trigger: refinance, sale, conversion, or lender transfer.
- Document backup liquidity so one timeline delay does not force a bad decision.
