Legal Definitions - standing mortgage

A standing mortgage is another term for an interest-only mortgage. This type of loan allows the borrower to pay only the interest on the principal balance for a specified initial period. During this interest-only phase, the amount of money originally borrowed (the principal) does not decrease. Once the interest-only period ends, the borrower typically begins making payments that include both principal and interest, or a large "balloon" payment of the entire principal amount may become due.

This structure can result in lower monthly payments during the initial period, offering flexibility for borrowers who anticipate future income increases, plan to sell the property, or wish to preserve cash flow for other investments.

• Example 1: Real Estate Investor

  A real estate investor purchases a dilapidated property with the intention of renovating it and selling it within 18 months. To minimize their monthly out-of-pocket expenses during the renovation phase, they secure a standing mortgage with an 18-month interest-only period. This means they only pay the interest on the loan each month, allowing them to allocate more capital towards construction costs. They plan to repay the entire principal balance from the proceeds of the property sale once the renovation is complete.

• Example 2: Temporary Financial Strategy

  A couple is buying their first home and expects a significant bonus from their jobs in two years, which they plan to use for a substantial principal reduction. To manage their current budget and save for other immediate needs like furniture and moving expenses, they opt for a standing mortgage with a two-year interest-only period. For these two years, their mortgage payments are lower because they are only covering the interest. After two years, they will either refinance into a traditional principal-and-interest mortgage or use their bonus to pay down a large portion of the principal before regular payments begin.

• Example 3: Commercial Property Development

  A small business owner is building a new office space for their growing company. They secure a construction loan that functions as a standing mortgage during the 12-month construction phase. This arrangement allows them to pay only the interest on the drawn funds as construction progresses, preserving their working capital for building materials, labor, and other operational costs. Once the building is complete and the business moves in, the loan will convert to a traditional mortgage requiring both principal and interest payments, or they may seek permanent financing.