The upside is that on a monthly basis you’ll have more cash, because you’re only paying the interest portion, not the principle.

If you go negative amortization and you’re paying less than the interest, they’ll just add that on to your total mortgage. That would mean each year you’d owe more, and that’s not a cool situation. It’s much more common in the US than in Canada. As a rule Canadian lenders won’t let you go into negative am territory without a very good reason like extreme hardship.

“Call your banker/mortgage broker and reduce your mortgage payments as close to interest-only as possible. Do not go into negative-amoritzation (i.e. where your loan gets bigger).”

What does negative amortization mean? I have a mortgage with RBC (P-0.75, where P was 3), with 35 years amortization. I called today, and the rep said with the old prime, my amortization is 28.x years. If I lower my payment to new prime, I am paying $90/mo less, but my amortization is back to 35 year, and will pay $12K interest in 35 years. I told them to hang on and let me think about it. Does it all make sense?

Part of yesterday’s conversation covered the times in our history when interest rates were 12-17%, as well as a semi-random journey into one man’s experience in post-war Germany hyper-inflation. The moral of that story is any interest rate below 10% is just fine when taking a 50 viewpoint.

The second part is that there’s little doubt that when approached from 5 year buy-and-hold time frame, investment real estate will do well. The challenge for many people will be the next 18 months or so, where prices may fluctuate and rents may go down in some areas. They’ve come down for some types of units in Kelowna during the last 6-8 months due to over-build.

The reason for going to maintenance payments is to bank the extra cash and build a reserve fund, making sure you’re able do deal with whatever the next year or two brings. The cash is more important than paying down the principle because our ability to leverage the principle has been seriously eroded. When you have extended vacancy, see lower rents, or have to make renovations to increase rent or valuation, you’ll be better with cash then you would with equity that you can’t access.

Could you expand on why you think we should drop mortgage payments to interest-only land?

-Jerry