Investors in Canada using Interest-Only financing!

11 Replies

Hi, 

My name is Chris and I am very new to the exciting world of real estate investing, but I have a keen interest and I am very motivated! Interest-only mortgages are now made available to Canadians by some finance institutions. I am new to the idea because as we know, Canadian banks are "boring". However we are secure;) But a new outlook into creating positive cash-flow for income- replacing investors is exciting am I right? What are your thoughts? 

Interest only financing has been available for quite some time (LoCs, bridge loans, off-market notes, etc) - this is not a new thing.

I’m sorry Roy but I don’t quite mean a LoC and such. I mean if I were to mortgage an investment property with a 20% down payment I do not need to make payments on the principal for a set amount of years, rather I can just make interest payments for say the term of the contract (5,10 years) at a fixed rate. If this has already been available to Canadian I was completely unaware. Keep in mind I am still a newbie so go easy on me. 

Originally posted by @Chris Kennedy :

I’m sorry Roy but I don’t quite mean a LoC and such. I mean if I were to mortgage an investment property with a 20% down payment I do not need to make payments on the principal for a set amount of years, rather I can just make interest payments for say the term of the contract (5,10 years) at a fixed rate. If this has already been available to Canadian I was completely unaware. Keep in mind I am still a newbie so go easy on me. 

 Chris:

A mortgage is what you (the mortgagor) give the lender (the mortgagee) as security for the financing provided.   Technically, you can give a mortgage to secure a line of credit (i.e a HELoC), a private loan, or another type of instrument.

Thank You Roy. Perhaps my inexperience is showing when trying to explain myself. I will re-word an article I recently read from a reliable source.

The product I'm speaking of has "one key purpose: to cut a borrower’s monthly carrying costs."

"Rates are higher than a conventional amortizing mortgage (as you’d expect given the higher risk), the payments are materially lower.

Take a $300,000 30-year-amortized mortgage, for example. A traditional adjustable-rate mortgage at prime – 0.75% has a payment of $1,210.

It requires a payment of just $918, almost $300 less each month. That's based on a 5-year adjustable interest-only rate of prime + 0.25%, a rate that is one point higher, but a quarter point less than most HELOC's.

You pay more interest on the mortgage itself, but interest cost is not necessarily determinant of net worth. That’s because the cash flow savings can be redirected to things like:

  • paying off higher interest debt
  • making other investments; or
  • letting folks with variable cash flow (e.g., self-employed or commissioned borrowers) make principal payments when they can, not when they have to.

It is available up to 65% loan-to-value in interest-only form. You can then add another 15% LTV in the form of a regular amortizing mortgage, for 80% LTV total.

Rates can be found with participating Vendors."

Roy do you currently use a product similar to this? Or is there someone here in Canada that can possibly enlighten me on whether or not they use this strategy?

This is news to me, but intriguing as I need creative financing for my next purchase in the Niagara Region...can I ask what your source is? And what vendors they say will provide this? 

@Chris Kennedy

Given the terminology used in your quotes, are you certain the article was not pertaining to the U.S.A.?

Private financing - such as a vendor carry - are often structure along these lines: interest only for 3-5 years or interest only for the first 2-3 years with annual principal re-payment amounts required in years 3-5.

In the commercial world, bridge or mezzanine financing often looks like this.

In the end, it all comes down to math:  what use of capital yields the best return.

@Sarah Schneider

That’s exactly my train of thought Sarah. The creativeness May be risky, but who’s into real estate for the “guarantees”. It’s all about having fun and learning along the way. I’m not sure that I can mention my source over this forum, having just a basic membership. DM me and I can send you the article and the Financial institutions name. 

@Roy N.

Yes this is Canadian. Only got approval via BoC mid-2018. You can also DM me for the article link Roy. 

@Chris Kennedy

I raised the question due to the usage of "adjustable-rate mortgage" (ARM) which is common in the U.S.A. but more frequently referred to as "variable rate" here. As far as actual lender product offerings, most ARMs in the U.S.A. function differently than variable rate {mortgage secured} financing here in Canada.

Scotia Bank has a product that does the 65% as a LOC and 15% conventional mortgage. The danger here is that it can allow you to buy marginal properties that would not cashflow otherwise. You don't want to barely cashflow, AND have almost NO mortgage pay down. You don't want to rely on appreciation alone to make money. Most properties do not cashflow as you expect once you factor in vacancy, repairs etc.

@Dan Zupancic

That’s a very good point Dan. There may be a product in the near future that will allow a property’s owner to show proof of a lease/rental on the property to allow the landlord to only pay interest on the mortgage to increase cash-flow and in turn have the ability to apply lump-sum payments to the principal at no or minimal fees. I’m speculating of course. I’m under the impression Canada is changing some of the ways we do banking, to attract investors for the long term.

But yes I do agree with that the risk is high given you are relying on one growth; appreciation. There should be a cap on the number of interest-only mortgages a borrower can have. Say two or three per borrower.

What do you think? I just love having these discussions hah. I appreciate everyone’s feedback up to this point. Cheers everybody! And thank you Bigger Pockets for giving me this platform to speak, so I don’t drive my wife crazy lol.

Originally posted by @Dan Zupancic :

Scotia Bank has a product that does the 65% as a LOC and 15% conventional mortgage. The danger here is that it can allow you to buy marginal properties that would not cashflow otherwise. You don't want to barely cashflow, AND have almost NO mortgage pay down. You don't want to rely on appreciation alone to make money. Most properties do not cashflow as you expect once you factor in vacancy, repairs etc.

Most of the Schedule 1 lenders have such a note/LoC hybrid offering with a total LTV of 75% or 80%. The mortgage covers both parts of the instrument.

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