Innovative mortgage product promises to stabilize cash flow

Investing in real estate can be tricky in a rising rate environment, but interest-only mortgages with term are helping stabilize cash flow.

“It’s the most innovative product that has come through the mortgage market for the last seven years,” said Jacques du Preez, principal broker and owner of Mortgage Allies. “Because of the new rental laws, you can’t just increase the rent on tenants, but at the same time you want to make sure your costs are stable. What turns a lot of people off is having a line of credit on a rental property because as time goes on, payments go up, so cash flow gets pressurized.”

du Preez likened the fixed-term rates on interest-only mortgages to variable rates, but without the risk of rising primes. He secured a 4.3% interest-only mortgage for a real estate investor client who locked it in for five years.

“They have a low payment, and that is fixed for five years,” he said. “If at any time they want to lock that in, they can lock it into a P&I [Principal and interest]. Variables are not good for rentals because it can impact the cash flow over time as the prime increases, but here the cash flow is sure for the next five years.”

Borrowers can also break the mortgage whenever they like with very little penalties.

“The client is king here,” said du Preez. “After two years, if the client decides to do something else, they can cancel the mortgage with very little penalties. They really are king.”

The interest-only flex mortgage has been on offer at Merix Financial for the past couple of months, and its reception has been resoundingly positive, according to the lender.

“The interest-only flex is all about providing clients lower monthly payments that allow them to free up cash flow for other purposes,” said Jill Paish, Merix’s executive vice president of broker experience. “We felt there was a real need for that type of mortgage for a variety of reasons. With the tightening rules and the way real estate prices are going, a lot of times clients can’t afford the monthly carrying costs, and the monthly costs are higher than they’d like to live in a desired marketplace.”

Merix has noticed many borrowers who have opted to take the interest-only mortgage are investing in real estate.

“We’re finding it’s being used by people who want to invest,” said Paish. “They’re taking a lower interest rate on their mortgage and using cash flow from that investment for a savings nest. We’re also finding that it’s popular with people who have various lifestyles, like cyclical income or a lot of overtime, and just want to make lower payments. When they have more money, they’ll pay a lump sum towards their mortgage.”