Interest-only mortgages can be a viable solution for those who have run into financial trouble, but first-time homebuyers are now using the product to get a foot in the quickly closing door to Canada’s real estate market.
“If first-time homebuyers are at the point where they need an interest-only loan, they shouldn’t be buying a house,” says Terry Lynch, a mortgage agent with TMG
Ontario. “I know it sounds draconian, but this is for people who are already down the road, for people who don’t have any solution. They’re using what they have in the house as a stop-gap measure. I would not see it for young people getting into their first home.”
Lynch says interest-only loans usually come with high interest rates and a pretty steep lenders fee – factors that are especially dangerous for first-timer buyers.
“If a first-time buyer has to resort to that kind of mortgage, frankly, they shouldn’t be getting into the market yet,” he says. “I know there are people who are desperate, but they have to temper their enthusiasm with a little caution.”
This type of mortgage product could also add to their mortgage amount, encouraging buyers to take on more than they should.
“Interest-only mortgages, along with the low interest rate, can basically approve a buyer for a lot more of a mortgage than they would in the interest-and-principal mortgage,” says Raymond Green, a broker with The Mortgage Centre-Baldassarra Financial Group. “(These) mortgages can affect the buyer with regards to future advancements on their property and the equity.”
Opponents of interest-only mortgages, particularly for first-time buyers, point to the economic crisis in the United States. The collapse of the market there was tied to many factors – include the extensive use of interest-only mortgages. While this mortgage product is a risky one, the likelihood of its use leading to U.S.-style collapse is slim – largely due to our country’s stringent banking rules.
“The issue with the U.S., why that did happen, is the lenders were dictating the interest rates and the (lending) criteria were easy to meet,” Green says. “So that’s why it’s very important for the Bank of Canada to enforce their rules along with the interest rates, to prevent a collapse in the economy.”