Standing Mortgage: What It Is, How It Works, Pros and Cons

What Is a Standing Mortgage?

A standing mortgage is a type of interest-only loan. It contrasts with a typical mortgage, in which a portion of each monthly payment goes to principal and another goes to interest. With a standing mortgage, you make interest-only payments for a set number of years. At the end of that period, the principal comes due in the form of a balloon payment.

Understanding a Standing Mortgage

The most common type of mortgage is an amortized loan, in which the borrower makes a fixed monthly payment, part of it going to interest and another part going to 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 toward principal in the later years.

Conversely, a standing mortgage's principal is not amortized during the interest-free period but only comes due after that as a balloon payment.

A standing mortgage is one type of standing loan, all of which operate in basically the same way. Standing loans may also be available to finance the purchase of a vehicle.

Standing mortgages are relatively uncommon because they pose an increased risk to the lender. The risk comes from the possibility that that the borrower will be unable to make the balloon payment at the end of the term. As a result, lenders are likely to charge higher interest rates on standing loans versus traditional loans, if they offer them at all.

There are also other kinds of interest-only mortgages. In one variation, the borrower makes interest-only payments for a certain period, after which their payments increase to include both principal and interest. Interest-only adjustable rate mortgages (ARMs) are one example.

Advantages and Disadvantages of a Standing Mortgage

A standing mortgage has advantages and disadvantages for borrowers, depending on their financial situation.

Advantages

A standing mortgage can be attractive to borrowers because interest-only loans usually come with lower monthly payments. As a result, borrowers may qualify for a larger mortgage than they would otherwise.

In particular, a standing mortgage might appeal to younger borrowers who have good reason to believe that their income will rise in the years ahead and that they will be able to save up for the balloon payment in the meantime. Borrowers who are expecting an inheritance or other future windfall might also be good candidates, although they run the risk that the money won't come through in time, if ever.

Disadvantages

A standing mortgage, or any kind of standing loan, can also mean added risk for a borrower. These loans may be offered with an adjustable rate, meaning that the interest rate has the potential to rise, leading to higher monthly payments. That could be a particular problem if the borrower's income doesn't go up as expected.

In addition, if the borrower fails to save enough money for the eventual balloon payment, they could default on the loan and, worse-case scenario, lose their home to foreclosure.

Similarly, a borrower who takes out a standing mortgage with the intention of refinancing into a different mortgage before the balloon payment comes due could find that impossible if either their income or the home's market value has fallen.

The Bottom Line

A standing mortgage can be attractive to some borrowers because of the lower monthly payments. But it also comes with substantial risks. Anyone contemplating a standing mortgage will want to take a hard look at whether they'll be able to make a large balloon payment at the end. If not, they might be better off with a different kind of loan.