On an interest-only loan, each payment covers the month’s interest and nothing else, so the balance doesn’t fall. Enter the loan, the rate and the term below to see the interest-only payment and the interest paid over the term. For a regular mortgage that pays down principal, use the mortgage payment calculator.
The monthly interest is the balance times the monthly rate. A Canadian fixed rate is quoted compounded semi-annually, so the monthly rate is (1 + r/2)^(1/6) โ 1 rather than r รท 12.
Interest-only vs an amortizing payment
Take a $500,000 loan at 5%.
| Interest-only for 5 years, then 20 years amortizing | Amortizing over 25 years from the start | |
|---|---|---|
| Payment for the first 5 years | $2,062 | $2,908 |
| Balance after 5 years | $500,000 | $442,538 |
| Payment from year 6 | $3,286 | $2,908 (unchanged) |
| Total interest over 25 years | $412,268 | $372,407 |
The interest-only payment is $846 a month lower at first. After five years the amortizing borrower has paid off $57,462 of principal; the interest-only borrower still owes all of it and has twenty years, not twenty-five, to repay it, so the payment rises by $1,224 a month, about 59%. If the rate at that point were 7% instead, the new payment would be $3,847.
The same rate is assumed throughout; in practice the rate resets at each renewal. The year-by-year split for the amortizing loan is on the amortization calculator.
Where interest-only borrowing shows up in Canada
Interest-only residential mortgages are uncommon at the big banks. They appear mostly as:
- Home equity lines of credit. A HELOC normally requires only the interest on what you have drawn; how much you can borrow is set by the limits on the loan-to-value calculator, and the HELOC calculator estimates the payment.
- Private and alternative lenders, often for short terms, construction or bridge situations, at rates above bank mortgages.
- Investment properties, where some lenders allow interest-only terms on rental mortgages.
Lenders that offer interest-only terms usually want a large down payment or substantial equity and a plan for repaying the principal.
The risks
- Payment shock when the interest-only period ends, larger still if rates have risen meanwhile.
- No equity from payments. Your equity grows only if the home’s value rises, and a price drop can leave you owing more than the home is worth.
- More interest in total, because the full balance accrues interest for longer.
- Qualifying. Lenders still test whether you could afford the amortizing payment at the stress-test rate; the stress test calculator shows that payment.
Ways to lower the payment without going interest-only
- A longer amortization. An insured mortgage is normally limited to 25 years, with 30 years open to first-time buyers and buyers of newly built homes since December 15, 2024; some lenders allow longer amortizations on uninsured mortgages. Every payment still reduces the balance. The 30-year amortization rules have the details.
- A lower required payment with prepayment options, then paying extra when cash flow allows; the extra payment calculator shows what extra payments save.
- A bigger down payment, which shrinks the loan and, at 20% or more, removes the insurance premium; see the down payment calculator.
Sources
The figures and rules on this page come from these sources, last checked against them between September 25, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- CMHC: CMHC Purchase
- Department of Finance Canada: Boldest mortgage reforms in decades come into force today