Interest-only mortgages not only pose greater risks for home buyers, mortgage lenders and mortgage insurers than traditional mortgages, but the head of the Bank of Canada warns they also pose a potential inflation risk.

And the bank plans to discuss that concern with the federal housing authority, which announced recently it will start insuring such mortgages, governor David Dodge said yesterday.

The offering of insurance for interest-only mortgages was one of several financial products introduced two weeks ago by Canada Mortgage and Housing.

"These innovative financial solutions will allow more Canadians to buy homes, and to do so sooner," CMHC president Karen Kinsley said at the time. "By reducing costs and increasing flexibility, CMHC continues to help Canadians realize their dreams of homeownership."

Such mortgages are more affordable, at least initially, because they allow buyers to pay only the interest on the mortgage for a five-year or 10-year period. They are risky in that the monthly costs of carrying the mortgage jump once the interest-only period ends and the homeowner must begin paying down the principal as well.

"Absent a very rapid expansion of supply, then the increases in demand simply will fuel prices rather than actually getting more people into housing, because you need an increase in supply over time to do that," he said.

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