Standing Mortgage

What Is a Standing Mortgage?

A standing mortgage is a type of interest-only loan, in contrast to a normal mortgage with amortizing principal. A standing mortgage has an interest-only period, where after principal payments kick in and then at the end of the mortgage's term, the remaining principal is due as a balloon payment.

Key Takeaways

  • A standing mortgage is an interest-only loan whereby a borrower pays the remaining principal balance at the end of the mortgage as a balloon payment.
  • Standing mortgages stand in contrast to amortizing mortgages where the borrower pays a monthly payment of both principal and interest until the loan is paid off by the end of the mortgage term.
  • Standing loans are not commonly offered as they bring increased risks to lenders who may not receive the balloon payment at the end of the loan term if a borrower defaults.
  • Because there is a risk of the balloon payment at the end of the loan not being paid, standard mortgages typically come with higher interest rates than amortized mortgages.
  • Standard mortgages can be advantageous to young and low-income borrowers as the monthly payment of the interest-only period makes purchasing a home more affordable.

Understanding a Standing Mortgage

The most common type of mortgage is an amortized loan, whereby the borrower pays a monthly payment of principal and interest until the loan is paid off by the end of the loan's term. These are level-payment amortization loans that apply a portion of each payment to the principal throughout the life of the loan.

A standing mortgage's principal, on the other hand, is not amortized during the life of the loan, but rather in total at the conclusion of the loan term. The principal of a standing mortgage loan is paid in full at maturity as a balloon payment.

A standing mortgage is a subtype of a standing loan, which operates in the same basic way, requiring the borrower to only make interest payments over the life of the loan, paying the remainder as a lump sum at the end of the loan term.

A standing loan isn’t offered often because its structure means increased risk for the lender. The risk comes from a higher likelihood that the borrower will be unable to make the balloon payment on the principal at the end of the mortgage term. For this reason, this type of loan is generally offered with a higher interest rate than a traditional loan and is generally issued in limited circumstances, one of which is a standing mortgage.

A standing loan is just one type of interest-only loan; more common interest-only loans include adjustable-rate loans, with the balloon payment expected at the end of an introductory period.

Advantages and Disadvantages of a Standing Mortgage

A standing mortgage can be attractive from a borrower’s perspective because they might not otherwise be able to afford a home. As one example, younger and lower-income borrowers anticipating lower monthly payments than a loan requiring repayment of principal can make all the difference in securing a home.

If these borrowers have good reason to believe that their income will rise in time and enable them to make that final principal payment, the standing loan structure gives them an opportunity to invest the money they would otherwise apply to loan payments elsewhere, with potential for asset-building and greater stability in the long run. Furthermore, interest payments on standing mortgages are generally tax-deductible, meaning the entire payment is tax-deductible.

A standing mortgage or any kind of standing loan, however, can mean added risk for a borrower. These loans can be offered at an adjustable rate, so rates have the potential to rise, meaning higher monthly payments. If the money otherwise spent on paying down the principal isn’t invested wisely, then the borrower might not find the security they will need when it comes time to pay off the principal.

This is especially true if the borrower’s anticipated income level at the end of the loan term doesn’t meet expectations. Finally, the borrower’s home value may not appreciate as quickly as desired, which may mean that selling might not be an option in order to cover the outstanding debt.