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An interest-only mortgage requires the borrower to pay only the interest charged each period, with no portion of the payment reducing the principal balance, usually for a defined introductory period before regular principal-and-interest payments begin (or until the loan is renewed, refinanced, or paid out in full). The outstanding balance does not shrink during the interest-only period.
Interest-only payments are lower than a blended payment on the same balance and rate, since none of the payment goes to principal. That can help with short-term cash flow — for example, an investor waiting on rental income to stabilize, or a homeowner covering a temporary gap — but it means the loan balance stays flat while interest cost is otherwise the same and no equity is built through repayment.
Interest-only structures are far more common with HELOCs and some private lender or short-term loans in Canada than with standard amortizing residential first mortgages, where most mainstream lenders default to blended principal-and-interest payments.
Common on HELOCs: the revolving portion of a home equity line of credit is typically interest-only by design; drawn balances do not amortize unless the borrower chooses to pay down principal.
Less common on first mortgages: few mainstream Canadian lenders offer interest-only first mortgages; where available, it is often through private or alternative lenders and for a limited term.
Qualification still applies: lenders still assess the borrower’s ability to service the debt, and insured mortgages are not compatible with an interest-only structure.
No equity built through payments: without principal reduction, any equity gain comes only from property value appreciation, not from the payments themselves.
A borrower has a $300,000 interest-only loan at an annual rate that charges $1,250 in interest this month, compared with a blended payment of $1,650 on an equivalent amortizing loan:
$300,000 − $0 = $300,000. The $400 difference between $1,650 and $1,250 is the principal that would have been repaid under a blended payment — it is simply not collected under an interest-only structure.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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