Interest-Only Mortgages: Pros and Cons

Interest-only mortgages allow borrowers to pay only the interest on their loan for a set period, typically 5-10 years, before beginning to pay both principal and interest. This can result in lower monthly payments during the interest-only period, which can be appealing for some borrowers.

One advantage of interest-only mortgages is the lower initial monthly payments. This can free up cash flow for other expenses or investments during the initial period. Additionally, because payments are lower, some borrowers may find it easier to qualify for a larger loan amount.

However, there are significant risks associated with interest-only mortgages. Once the interest-only period ends, borrowers will face a sharp increase in their monthly payments as they begin to pay off the principal. This can lead to financial strain if borrowers are not prepared for the higher payments.

Another drawback is that since no principal is being paid down during the interest-only period, the borrower’s loan balance remains unchanged, which means they are not building equity in the property. This can be problematic if the home’s value decreases or if the borrower needs to sell the home.

In summary, interest-only mortgages can offer lower payments in the short term but come with risks such as payment increases and lack of equity buildup. They are best suited for borrowers who are comfortable with the potential future increases in payments and have a plan for managing them.