| An interest-only loan is a loan in which
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| | borrowing money to buy an asset that is
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| for a set term the borrower pays only the
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| | unlikely to depreciate much and which can
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| interest on the principal balance, with
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| | be sold at the end of the loan to repay
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| the principal balance unchanged. At the
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| | the capital. For example, second homes,
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| end of the interest-only term the
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| | or properties bought for letting to
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| borrower may enter an interest-only
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| | others. In the United Kingdom in the
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| mortgage, pay the principal, or (with
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| | 1980s and 1990s a popular way to buy a
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| some lenders) convert the loan to a
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| | house was to combine an interest-only
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| principal and interest payment (or
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| | loan with an endowment policy, the
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| amortized) loan at his/her option.
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| | combination being known as an endowment
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| US interest only mortgages
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| | mortgage. Since the poor stock market
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| In the United States, a five or ten year
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| | performance of the late 1990s, endowment
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| interest-only period is typical. After
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| | mortgages have become unpopular.
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| this time, the principal balance is
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| | Canadian interest only mortgages
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| amortized for the remaining term.[1] In
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| | Some interest-only mortgages in Canada
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| other words, if a borrower had a
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| | allow the borrower to pay interest-only,
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| thirty-year mortgage and the first ten
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| | principal and interest, or even principal
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| years were interest only, at the end of
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| | and interest plus 20% extra. An
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| the first ten years, the principal
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| | interest-only mortgage in Canada can be
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| balance would be amortized for the
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| | combined with corporate bonds in a
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| remaining period of twenty years. The
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| | Registered Retirement Savings Plan (RRSP)
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| practical result is that the early
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| | where the plan holder receives a tax
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| repayments (in the interest-only period)
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| | deduction, tax deferral, and compound
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| are substantially lower than the later
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| | interest.
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| repayments. This enables a borrower who
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| | From an investor's perspective
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| expects to increase their salary
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| | Interest-only loans are sometimes
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| substantially over the course of the loan
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| | generated articifially from structured
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| to borrow more than they would have
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| | securities, particularly CMOs. A pool of
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| otherwise been able to afford, or
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| | securities (typically mortgages) is
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| investors to generate cashflow when they
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| | created, and divided into tranches. The
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| might not otherwise be able to. During
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| | cashflows that are received from the
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| the interest-only years of the mortgage,
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| | underlying debts are spread through the
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| one is essentially renting the house
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| | tranches according to predefined rules,
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| since none of the principal loan
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| | an Interest-only (IO) loan is one type of
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| decreases. The two great disadvantages
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| | tranche that can be created, it is
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| are that in many states one has to pay
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| | generally created in tandem with a
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| property tax and purchase mandatory
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| | principal only (PO) tranche. These
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| property insurance.[2]. On the other
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| | tranches will cater to two particular
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| hand, the owner is still gathering
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| | type of investors, depending on whether
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| appreciation, even if they aren't paying
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| | the investors are trying to increase
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| down equity against their loan, and there
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| | their current yield (which they can get
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| are many other tax advantages to home
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| | from an IO), or trying to reduce their
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| ownership not available to renters. In
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| | exposure to prepayments of the loans
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| cases of aggressive appreciation (e.g.
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| | (which they can get from a PO).
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| "flipping" homes), a 100%
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| | Many homeowners saw the values of their
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| mortgage-to-value interest-only loan may
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| | homes increase by as much as 4 times its
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| also be able to be converted to a
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| | price in some markets in a 5 year span in
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| conventional mortgage with a more
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| | the early 2000s. Interest-only loans
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| favorable mortgage-to-value loan,
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| | helped homeowners afford more home and
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| resulting in an overall lower payment.
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| | earn more appreciation during this time
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| UK interest only mortgages
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| | period
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| Interest-only loans are popular ways of
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