A New Interest-Only Mortgage from Meridian

—The Mortgage Report: Oct. 15—

  • Canada has had interest-only home financing for decades, the most popular type being the HELOC. But it’s hard to find a mainstream lender selling an interest-only mortgage. That’s partly what makes Meridian Credit Union’s new Hybrid mortgage interesting.
  • The Meridian Hybrid is a traditional mortgage and interest-only (I/O) loan in one. It lets someone with a 20%+ down payment pay interest only on up to 60% of a home’s value and principal and interest on another 20%. The I/O portion is limited to 75% of the total financing.
  • The point of the Hybrid is to lower your monthly payments and make it easier to qualify. Unlike banks that “stress test” you—i.e., make you prove you can afford payments at a 4.79%+ interest rate—Meridian allows you to qualify simply by proving you can afford the minimum required payment, which is mainly interest-only. That nets you a much bigger loan amount on the same size income.
  • Its interest-only rate doesn’t do Meridian any favours, however. It’s currently 3.83% (variable) and 3.92% (5-year fixed). That reflects the fact that there is a “certain amount of risk associated with this product,” says Carolyn Devic, Director, Share of Wallet & Retention at Meridian.
  • While 3.83%+ won’t excite many people, some will pay it to buy now instead of later. The difference in maximum loan amount with Meridian’s Hybrid is considerable. Someone making $100,000 with 40% down and no other debt, for example, could qualify for over 50% more home (for a roughly similar monthly payment)—compared to a borrower who used a bank and was stress tested.
  • Whether that’s prudent or not, you can decide. Compared to the lowest uninsured rate in the market, someone getting a $400,000 interest-only Hybrid might pay roughly $40,000 more interest over five years. That’s the price of getting into the housing market quicker — versus having to wait and save a bigger down payment, settle for a cheaper property or add more income.
  • Devic calls the Hybrid “a short-term solution to help you get over that hump—where your salary is catching up to your life.” She says the credit union then encourages borrowers to move “to more of a standard principal and interest payment.”
  • The target customer is someone who’s got excellent credit, high earning power and a temporarily high debt load, Devic says. That might be someone fresh out of medical, law, dentistry or engineering school, a newly graduated programmer, an apprentice about to become a full-time tradesperson, or anyone expecting a significant jump in salary.
  • The Hybrid is available from branches and mobile mortgage specialists only, not via brokers. It’s available on purchases (no refinances) and is sold in Ontario only (all regions of the province). Maximum loan amounts are determined “case-by-case,” but Meridian does lend on home values over $1 million.

Funding a New Business With No Proof of Income

  • Unemployed homeowners with significant equity and risk tolerance can still borrow to start a new business (if appropriate). That story…

Quotable

  • “The reality is that some of today’s big city borrowers will never pay off their mortgage.”—Financial Planner, Jason Heath (FP)


9 Comments

  • Johnny Le says:

    Very interesting article. I would definitely give this company a call next year to discuss about my mortgage.
    A little understanding and flexibility is all we need in time on time of crisis.

  • kev says:

    I would definitely bite on this at the right rate but 3.92% for 5 years is a huge turn off. Prime + 1% seems far more reasonable especially for someone with salaried income and a 750 credit score.

    • The Spy says:

      Hey Kev, I suspect they might revisit their pricing at some point. For now, there aren’t many great alternatives that allow qualifying on a 75% interest-only payment.

  • question says:

    Anyone know if any BC lenders offer something similar?

    • The Spy says:

      @Question, There might be but I can’t think of any off the top of my head. You might want to try a credit union like BlueShore if you’re in their lending area. They offer a bit more flexibility.

  • Navdeep Singh says:

    How is interest only mortgage better than a HELOC? The rates seem higher, is it easier to qualify in lieu of the HELOC?

  • Abbas Moshkforoush says:

    5 year Variable 1.6% Vs. 5 year fixed 1.64%
    Is this a big mistake to go with variable?

    • The Spy says:

      Hi Abbas, It may be a mistake depending on your risk tolerance, 5-year plan, finances and lender selection. But for your average borrower, I doubt it would be a catastrophic mistake. What do you hope to gain (besides 4 bps upfront) with a variable rate?

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