Which type of loan has the most default risk?

The interest-only loan has the most default risk primarily because it allows borrowers to pay only the interest for a set period without reducing the principal balance. This can create a significant risk for the borrower, especially if property values decline or if there is a financial shift making it difficult for them to start paying down the principal later on.

When the interest-only period ends, the borrower typically faces a much larger payment since they must begin repaying both principal and interest, which can dramatically increase their monthly obligation. If the borrower is unable to manage this increased payment, or if they have not built equity in the property during the interest-only phase, the likelihood of default increases significantly.

In contrast, fixed-rate mortgages, while they also have risk, provide predictable payments that don't increase, making them easier to manage over time. Adjustable-rate mortgages do carry risk due to potential increases in interest rates but usually begin with lower initial payments. Second mortgages have their own risks associated with being subordinate to the first mortgage but generally have lower immediate payment expectations and can be part of a structured borrowing strategy alongside primary financing.