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An interest-only mortgage is a form of mortgage that allows the borrower to only pay the interest every month for a set period. The principal loan amount will later be paid at the end of the term, usually in the form of a lump sum or occasionally in payments. Interest-only mortgages offer borrowers some of the lowest monthly payments seen in the world of mortgage lending.
This is opposed to most standard mortgages. In most standard mortgages the principal loan amount is repaid on a monthly basis in addition to interest.
Typically interest-only mortgages are only offered with a variable or adjustable interest rate. In addition to that, the term for an interest-only mortgage is usually short, usually spanning between 5 to 10 years.
Interest-only mortgages may suit property “flippers” or investors with a short time frame in mind best. As the monthly payments are low, once the term of the mortgage is close to ending, an investor can sell the property, repay the principal amount, and pocket any profits made.
Not everyone is eligible for an interest-only mortgage, and there are some strict stipulations. A borrower is required to have a low DTI ratio and a good-to-excellent credit score. A larger down payment and collateral are also typical. Lenders may have more or slightly different requirements, although this is on a case to case basis.
Interest-only mortgages can be difficult to qualify for and suit only a portion of homebuyers. One should consider it if they are interested in investing in property on a short-term basis.