Standing Mortgage Definition

What Is a Standing Mortgage?

A standing mortgage is a type of interest-only loan, in contrast to a conventional mortgage, which has a portion of the monthly payment going to principal and interest. A standing mortgage comes with a period in which you pay interest-only payments for a set number of years. After the inter-only period ends, the principal payments kick in, and then at the end of the loan's term, the remaining principal is due as a balloon payment.

Understanding a Standing Mortgage

The most common type of mortgage is an amortized loan, whereby the borrower pays a fixed monthly payment, in which a portion goes to interest and the principal until the loan is paid off. The principal is the original amount borrowed. With conventional fixed-rate mortgage loans, a larger percentage of the payment is applied to interest in the early years and more towards principal in the later years.

Conversely, a standing mortgage's principal 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 a similar 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 as common because its structure results in an increased risk for the mortgage 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. As a result, lenders may charge higher interest rates with standing loans versus traditional loans and are issued in limited circumstances, one of which is a standing mortgage.

A standing loan is just one type of interest-only loan offered by mortgage lenders. Other 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 has advantages and disadvantages for borrowers but can depend on their financial situation.

Advantages

A standing mortgage can be attractive to borrowers because interest-only loans usually come with lower monthly payments initially. As a result, the lower payments might help borrowers qualify for a mortgage that they wouldn't otherwise be able to with a traditional amortized loan. In particular, younger and lower-income borrowers might be able to secure a home with lower payments.

If these borrowers have good reason to believe that their income will rise in time, the standing mortgage will enable them to make that final principal payment. The money saved from the lower mortgage payments could also be invested with the potential for asset-building and greater financial stability.

Disadvantages

A standing mortgage or any kind of standing loan can lead to added risk for a borrower. These loans can be offered at an adjustable rate, meaning rates have the potential to rise, leading to higher monthly payments. If the money otherwise spent on paying down the principal isn’t saved or invested wisely, the borrower might not have the needed financial assets when it comes time to pay off the principal.

Another risk to the borrower is the potential for a change income. If the borrower’s income is lower at the end of the loan term, it might be challenging to pay the balloon payment.

Another risk can occur if the home value doesn't appreciate as expected or decreases, which may mean selling the home to cover the outstanding debt.

The Bottom Line

A standing mortgage can be attractive to some borrowers, depending on their needs and financial situation. The interest-only period can be beneficial since it usually comes with lower monthly payments. As a result, the lower payment might help borrowers qualify for a mortgage loan. However, if the loan's interest rate is adjustable, the rate could reset higher, increasing the monthly payment.

Other risks include a decrease in the borrower's income, making it more challenging to pay the principal payments or balloon payment. Also, the home's value could decline, leading to a lower amount recouped when the house is sold to payoff the principal balance. Please consult a financial professional before considering a standing mortgage to ensure it's the right mortgage product for you.