Looking for Interest-Only Mortgage Options in Ontario?

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If you're shopping around for a mortgage in Canada, you might hear the term “interest-only mortgage.” It sounds like a good deal at first—you only have to pay the interest on your loan every month. That means lower monthly payments, at least in the beginning.

But like anything that sounds too good to be true, interest-only mortgages come with both benefits and risks.

What Is an Interest-Only Mortgage?

An interest-only mortgage is a type of loan where you only pay the interest each month for a certain period.

This means you’re not paying down the loan itself (called the principal) during that time.

Let’s say you borrow $400,000 at 5% interest on an interest-only mortgage.

Your monthly payment would be about $1,667, and all of that goes toward interest. You still owe the full $400,000 at the end of the interest-only period.

After that period ends, your monthly payments jump because you have to start paying off the loan and the interest.

Your monthly payment would be about $2,326 with the same mortgage with a 25-year amortization period,

Why Do People Consider Interest-Only Mortgages?

Here are a few common reasons why someone might look at an interest-only mortgage:

They want lower monthly payments at first.

They plan to sell or refinance before the interest-only period ends.

They have irregular income and want flexibility (like business owners or commission-based workers).

They want to free up cash in the short term for other investments or expenses.

When Does an Interest-Only Mortgage Make Sense?

It might be a good option if:

You have a strong financial plan

You expect your income to grow

You’re buying the property as a short-term investment

You need short-term flexibility, not a long-term loan

But if you’re planning to live in the home long-term, or you’re not comfortable with your payment jumping in the future, a traditional mortgage may be safer.

Pros of Interest-Only Mortgages

Let’s take a look at some of the advantages of this type of mortgage.

1. Lower Monthly Payments (For Now)

This is the biggest draw.

Since you’re only paying the interest and not the principal, your monthly payments can be hundreds of dollars lower than a regular mortgage.

This might help if:

You’re dealing with high monthly expenses

You’re buying a home in an expensive market

You’re waiting for your income to go up in a few years

2. Cash Flow Flexibility

If your income goes up and down, an interest-only mortgage might give you breathing room. Some months you can pay extra toward the principal, and other months you just make the minimum interest payment.

This is especially helpful for:

Self-employed people

Real estate investors

Seasonal workers

3. Short-Term Strategy

Some people use interest-only mortgages as a short-term strategy.

If you’re planning to sell the home within a few years (say before the higher payments kick in), you could benefit from the lower payments without worrying about long-term costs.

This can make sense in a rising real estate market, where you expect the property to grow in value quickly.

4. More Money for Other Goals

Since you’re spending less on your mortgage each month (at least at the start), you can put that money toward:

Paying off high-interest debt

Starting a business

Investing in other things like RRSPs or TFSA

Making home improvements

This flexibility can help people who are financially savvy and have a solid plan.

Cons of Interest-Only Mortgages

As you might expect, there are some real risks with this type of mortgage. Let’s take a look at the downsides.

1. You’re Not Building Equity

In a traditional mortgage, you slowly build equity—the part of the home you actually own.

With an interest-only mortgage, you’re not paying off any of the loan, so you’re not building equity unless your home goes up in value.

That can become a problem if:

You want to refinance later

Home prices drop

You’re not able to sell the property

2. Big Payment Shock Later

After the interest-only period ends, your payments go way up—because now you have to pay both the interest and the full principal, usually over a shorter time period.

This is called payment shock, and it can be tough if you’re not prepared.

You borrow $400,000 on a 25-year mortgage

You only pay interest for 5 years

Now you have to pay off the full $400,000 in just 20 years

Your payments could rise by 30–50% or more.

3. Higher Risk of Negative Equity

If the housing market dips, you might owe more than your home is worth—especially since you haven’t been paying down the loan.

This is known as negative equity or being “underwater” on your mortgage. That can make it:

Harder to sell the home

Harder to refinance

More financially stressful if you need to move

4. May Not Be Offered by All Lenders

Interest-only mortgages aren’t as common in Canada as they are in the U.S., and not all lenders offer them.

They’re usually only available through:

Some B lenders (alternative lenders)

Private lenders

Special products for investment properties

5. You Might Not Save Long-Term

While the short-term savings can feel great, you’ll likely pay more in total interest over the life of the loan compared to a regular mortgage—especially if you don’t make extra payments.

That’s because:

Your loan balance doesn’t go down during the interest-only period

You pay interest on the full balance for longer

So unless you’re actively managing your money and using the extra cash wisely, this loan can end up costing you more.

Who Should Avoid Interest-Only Mortgages?

This type of mortgage may not be a good fit if:

You have a tight budget or fixed income

You plan to stay in the home long-term

You don’t have a plan to pay off the principal

You’re not comfortable with interest rate risk (especially if it’s a variable-rate loan)

In short: if you want predictability, or you’re unsure of your future income, this probably isn’t the best route.

Interest-Only Mortgages in Canada

Unlike in the U.S., interest-only mortgages in Canada are less common and usually offered by private or alternative lenders.

Some important facts:

You’ll likely need at least 20–25% down to qualify

You’ll need a strong exit strategy—like refinancing, selling, or switching to a regular mortgage

They may come with slightly higher interest rates or shorter terms

These are more often used for investment properties or short-term bridge loans, not for long-term homeownership.

Talk to a Mortgage Broker Before You Decide

Interest-only mortgages aren’t one-size-fits-all. They can work well in the right situation, but they carry real risks if you’re not prepared.

That’s why it’s smart to speak to a licensed mortgage broker who can:

Compare interest-only vs. regular mortgage options

Help you run the numbers for both short and long term

Show you alternative options like HELOCs or blended mortgages

Recommend lenders that offer these products in Ontario

At 360Lending, we specialize in helping Canadians understand the risks and rewards of unique mortgage strategies. Whether you’re buying, refinancing, or looking at second mortgages—we’ll help you make the smart choice for your situation.