Glossary
Interest-Only Mortgage
A mortgage where the borrower pays only interest for a set period, so the principal balance does not fall until the period ends..
An interest-only mortgage is a mortgage where the borrower pays only the interest for a set period, so the outstanding balance — the mortgage principal — does not fall during that period. Once the interest-only window closes, payments rise to cover both principal and interest.
How the payment is structured
Every mortgage payment splits into two parts: interest, which is the lender's charge on the balance, and principal, which reduces what you owe. A standard Canadian mortgage blends the two from the first payment. An interest-only structure removes the principal portion for a defined window, which lowers the payment during that window but leaves the balance unchanged.
Because interest is charged on a larger balance for longer, an interest-only period typically increases the total interest paid over the life of the mortgage compared with a fully amortizing loan. Equity builds more slowly too, since only market appreciation and any voluntary prepayments add to it.
The Canadian context
Interest-only terms are not typical on standard residential mortgages from federally regulated lenders. OSFI Guideline B-20 expects lenders to assess a borrower's ability to repay principal and interest, not interest alone, and the federal mortgage stress test qualifies borrowers at a higher rate than their contract rate. Where interest-only features do appear in Canada:
- Home equity lines of credit, which are often interest-only during the draw period.
- Reverse mortgages, where no scheduled principal payment is required until the home is sold or the borrower moves.
- Private and alternative lending, where short terms and interest-only payments are sometimes used.
- Static-rate variable mortgages, where a fixed payment may not cover interest after rate increases, pushing unpaid interest onto the balance — see negative amortization.
Why it matters to a borrower
A lower payment can ease cash flow during a renovation, a parental leave, or a temporary income gap. The trade-off is that the balance at renewal equals the balance at the start, so the remaining amortization is compressed and the payment jumps once principal repayment resumes. Borrowers should confirm in writing how long the interest-only period lasts, whether the payment recasts automatically, and what prepayment privileges apply. See how mortgage payments are calculated for the mechanics.
Frequently asked questions
Are interest-only mortgages available in Canada?
They exist, but they are uncommon on standard residential mortgages. Federally regulated lenders generally underwrite to principal-and-interest payments under OSFI Guideline B-20, and the federal stress test applies. Interest-only features show up more often on home equity lines of credit, reverse mortgages, and some private or alternative lending products. Availability depends on the lender and the property type.
Does an interest-only mortgage build home equity?
Not from payments. Because no principal is repaid during the interest-only period, the balance stays the same, so equity grows only through property appreciation or voluntary prepayments. Once the period ends and principal repayment resumes, equity builds through the regular amortization schedule. Falling market values would reduce equity instead, which increases the risk for the borrower.
What happens when the interest-only period ends?
Payments generally rise, because the remaining balance must now be repaid with interest over the time left in the amortization period. A shorter remaining amortization means a larger required payment. Lenders often recast the schedule automatically, but borrowers should confirm the new payment in advance and check whether lump-sum prepayments or a refinance would help.
Sources
Related terms
- Negative Amortization — Negative amortization happens when a mortgage payment does not cover the interest owed, so unpaid interest is added to the balance and the debt grows.
- Mortgage Principal — The mortgage principal is the amount of money actually borrowed, separate from the interest charged on that balance over time.
- Amortization Period — The amortization period is the total length of time scheduled to pay off a mortgage in full, assuming every payment is made as agreed.
- Prepayment Privilege — A prepayment privilege is the contract right to pay extra on your mortgage, up to a set cap, without triggering a penalty.
- Home Equity Line of Credit (HELOC) — A revolving credit line secured by your home, usually capped at 65% loan-to-value and typically priced off the lender's prime rate.