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![]() This is much more likely to work out profitably if you are experienced in house repairs. One situation where an interest-only mortgage would make sense is when a home sells significantly below its market value, either because the seller needs cash in a hurry or because the house requires some repairs. Still, the most practical solution is to look for a house with a smaller price tag. ![]() If you have difficulty qualifying for a mortgage in which installments include both the principal and interest, the ideal solution would be to increase your earnings. Thus at the end of the interest only term, they likely would have trouble either just paying back their loan or handling larger payments from turning an interest only mortgage into a conventional mortgage.īecause of the significant risk related to refinancing at the end of the interest only term, in most situations, it is best to avoid an interest-only mortgage. ![]() The most likely reason for a person looking for an interest-only mortgage is that they have difficulty handling installments of a conventional mortgage. In that case, all the interest you have paid during the interest only period is extra money out of your bank account. This higher risk means that you would have to pay a higher mortgage interest rate.Īlso, suppose at the end of your interest-only mortgage term, you roll over into a conventional mortgage. This means that, unlike a regular Canadian mortgage, the risk of an interest only mortgage does not decrease with time. The point is that with an interest only mortgage, your home equity does not increase (assuming other conditions like the state of the housing market in your area and the longevity of your house stay the same). This means that you would need a minimum of 20% down payment if you plan to purchase a house with an interest only mortgage. Thus one can’t insure an interest only mortgage against default. Yet an interest only mortgage does not satisfy the amortization requirement of mortgage insurers. Alternative lenders are not obliged to perform a stress test as OSFI does not regulate them. Alternative lenders include credit unions, B-lenders, monoline lenders and private lenders. ![]() In RMUP, FRFI is expected to determine the maximum amortization for residential mortgages it underwrites.Īs a result, an interest only mortgage can only be offered by an alternative mortgage lender. In Guideline B-20, each FRFI is mandated to have a residential mortgage underwriting policy (RMUP). Since residential mortgages are an important part of the business of FRFI, OSFI has issued Guideline B-20, which details what it expects of FRFIs concerning residential mortgages. ![]()
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