This interest-only mortgage calculator helps you calculate the payments on loans that only charge the interest in Canada.
What is an interest-only mortgage?
An interest-only loan is a loan where your payment is only for interest and does not go towards paying down the principal on the loan. Some mortgages will have initial periods where the payments are interest only. This initial lower payments help to increase mortgage affordability which is quite helpful to first-time homebuyers.
How does this interest only mortgage calculator work?
This interest only calculator works by calculating the interest that you will pay over the term of your interest-only loan. This calculation takes the interest rate on the mortgage and multiplies it by the principal balance to provide you with your monthly interest payment. For total interest to be paid over the course of the term it multiplies this monthly amount by the total periods in your loan.
If you want to see how an interest only mortgage payment compares to one which also pays down principal, check out this mortgage payment calculator.
Interest-only vs traditional mortgage payments
With a traditional mortgage, each payment includes both principal and interest. Over time, a larger portion of your payment goes toward principal as the balance decreases. With an interest-only mortgage, your payments during the initial period cover only the interest charges, meaning the principal balance stays the same.
For example, on a $500,000 mortgage at 5%, an interest-only payment would be approximately $2,083 per month, while a traditional 25-year amortized mortgage payment would be around $2,908. That difference of $825 per month can be appealing, but you are not building any equity through your payments. Use our mortgage calculator to compare the full cost of a traditional mortgage side by side.
Who offers interest-only mortgages in Canada?
Interest-only mortgages are uncommon at Canada’s major banks for residential properties. They are primarily available through:
- Private lenders — These lenders offer more flexible terms but charge higher interest rates, often 7% to 12% or more.
- Some credit unions — A small number of credit unions may offer interest-only options on a case-by-case basis.
- HELOCs — A Home Equity Line of Credit functions similarly to an interest-only mortgage because you are only required to make interest payments on the outstanding balance. Check our HELOC calculator to estimate your payments.
Because these products carry higher risk for lenders, expect stricter qualification requirements and higher rates than a conventional mortgage.
Interest-only mortgage risks
Before choosing an interest-only mortgage, consider these key risks:
- Payment shock — When the interest-only period ends, your payments can increase dramatically as you must now repay the full principal over the remaining term.
- No equity built — Since none of your payments reduce the mortgage balance, you do not build equity through regular payments. Your equity only grows if the property appreciates.
- Negative equity risk — If property values decline, you could owe more than your home is worth since you have not paid down any principal.
- Higher total interest cost — You will pay significantly more interest over the life of the loan compared to a traditional mortgage.
To understand how much home you can realistically afford, try our mortgage affordability calculator which accounts for standard amortizing payments.
Interest-only vs standard mortgage: payment comparison
This table compares monthly payments on a $500,000 mortgage at 5% interest for both an interest-only mortgage and a standard amortizing mortgage over a 25-year amortization.
| Interest-Only Mortgage | Standard 25-Year Mortgage | |
|---|---|---|
| Monthly payment (first 5 years) | $2,083 | $2,908 |
| Monthly savings vs standard | $825/month | — |
| Principal paid after 5 years | $0 | $55,900 |
| Equity from payments after 5 years | $0 | $55,900 |
| Remaining balance after 5 years | $500,000 | $444,100 |
| Monthly payment after interest-only period (20-year remaining amortization) | $3,283 | $2,908 (unchanged) |
| Total interest paid over 25 years | $540,920 | $372,400 |
While the interest-only period provides noticeably lower payments, the total cost of the mortgage is significantly higher because you pay interest on the full principal for the entire term. The payment increase after the interest-only period can be substantial.
Who qualifies for an interest-only mortgage in Canada?
Because interest-only mortgages carry higher risk, qualification requirements are stricter than for conventional mortgages:
- Higher credit score — Most lenders require a credit score of 680 or higher, and private lenders may have different criteria.
- Larger down payment — Expect to need at least 20% down, as CMHC-insured mortgages do not offer interest-only options.
- Proof of repayment plan — Lenders want to see how you intend to pay down the principal when the interest-only period ends.
- Strong income or assets — You may need to demonstrate that you can handle the higher payments once amortization begins.
- Investment or rental properties — Some lenders only offer interest-only terms on investment properties, not primary residences.
Most Canadians looking at major banks for their primary residence will not find interest-only mortgage products. The options are primarily through private lenders and select credit unions, where higher rates apply.
What happens when the interest-only period ends?
When the interest-only period expires, your mortgage converts to a fully amortizing loan. This means your payments now include both principal and interest, but over a shorter remaining term. The result is often a dramatic payment increase known as payment shock.
Using the $500,000 mortgage example above at 5% interest:
- During interest-only period: $2,083/month
- After 5-year interest-only period (20 years remaining): $3,283/month
- Payment increase: $1,200/month (a 58% jump)
If interest rates have risen during the interest-only period, the payment shock can be even more severe. For example, if your rate increases to 7% at renewal, the payment could jump to approximately $3,860/month — an 85% increase from your interest-only payment.
This is why it is critical to plan ahead. Use our mortgage calculator to model different scenarios and ensure you can afford the higher payments when the time comes.
Pros and cons of interest-only mortgages
| Pros | Cons |
|---|---|
| Lower monthly payments during the interest-only period | No equity built through payments |
| Improved short-term cash flow | Significant payment shock when the period ends |
| Useful for investors maximizing rental cash flow | Higher total interest cost over the life of the loan |
| Flexibility to direct extra cash to other investments | Risk of negative equity if property values decline |
| Can bridge income gaps for those expecting higher future earnings | Limited availability at major Canadian banks |
| Potential tax advantages for investment properties | Higher interest rates from private lenders (7%–12%+) |
Alternatives to interest-only mortgages
If you are attracted to lower payments but want to avoid the risks of an interest-only mortgage, consider these alternatives:
HELOC (Home Equity Line of Credit)
A HELOC allows interest-only payments on the outstanding balance and provides flexibility to draw and repay funds as needed. You need at least 20% equity in your home to qualify. HELOCs typically have variable rates tied to the prime rate.
Longer amortization period
Extending your amortization from 25 to 30 years reduces your monthly payment. First-time buyers purchasing new builds may qualify for a 30-year insured amortization. While you pay more interest over the life of the loan, you still build equity with every payment.
Variable-rate mortgage
A variable-rate mortgage may offer a lower initial rate than a fixed-rate mortgage, reducing your payments in the short term. However, your rate will fluctuate with the Bank of Canada’s policy rate. Use our mortgage stress test calculator to see if you qualify.
Making extra payments
If affordability is a concern, consider a standard mortgage with the option to make extra payments when your cash flow allows. This gives you the flexibility of lower required payments while still paying down principal when possible.
Renting and investing the difference
In some markets, renting may be more affordable than buying. The money you would have spent on a down payment and higher mortgage costs could be invested instead. Compare the long-term outcomes using our investment calculator.
Related calculators
- Mortgage Calculator — Calculate standard monthly mortgage payments
- Mortgage Affordability Calculator — See how much home you can afford
- Mortgage Amortization Calculator — View your full amortization schedule
- HELOC Calculator — Estimate Home Equity Line of Credit payments
- Mortgage Down Payment Calculator — Calculate your minimum down payment
- Mortgage Stress Test Calculator — Check if you pass the stress test
- Mortgage Refinance Calculator — Compare refinancing scenarios
- Land Transfer Tax Calculator — Estimate closing costs on your purchase