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Interest-Only Commercial Mortgages

Benefits to a business of opting for an interest only commercial mortgage

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 29, 2021

commercial mortgage can be arranged on an interest-only basis for those who’d prefer this option to a capital and repayment agreement. In this article, we will look at some of the key benefits and drawbacks of using this type of mortgage for your business funding requirements.

Once you’ve looked through the information below, make an enquiry and we can arrange for a commercial mortgage broker we work with to contact you and discuss further.

Can I get an interest-only commercial mortgage?

Provided you meet the mortgage lender’s criteria for an interest-only commercial mortgage, there’s no reason why not. In addition to assessing your creditworthiness and the viability of your investment, the lender will also need to see a repayment vehicle (I.e. a solid plan to settle the debt at the end of the term) if you’re applying for your mortgage on an interest-only basis.

Read on to find out how interest-only commercial mortgages work, how to qualify for one and how to start your application…

How does an interest-only commercial mortgage work?

With an interest-only commercial mortgage the capital and interest elements of the loan are kept separate and your lender will only collect your interest payments on a regular basis. The capital element needs to be catered for through an acceptable repayment vehicle that will cover this amount and repay it in full at the end of the term (or before). The lender will need to see evidence of your repayment vehicle in advance and will carry out checks to make sure it’s viable.

Interest-only commercial mortgages work in exactly the same ways as their residential equivalents. The only difference is that it would be used to secure funding for a business rather than for a home you’re planning to live in or rent out.

What are the benefits of an interest-only mortgage?

Some of the key advantages for a business wishing to use an interest-only mortgage are outlined below:

Low repayments

An obvious benefit for both business and residential mortgages of this type. As you’re only paying the interest element your outlay will be lower. From a business perspective, this will help your cash flow position allowing for more to be invested into your commercial activity.

More flexibility to repay

If your commercial activity is such that you can generate large amounts of money during random periods then an interest only commercial mortgage could give you greater flexibility to repay your debt in full earlier than planned.

Generally, capital and repayment mortgages will only allow you to repay up to certain amounts over and above your regular repayments (say, 10% per annum) which, in the long run, could cost you more in interest.

Commercial investment property

If your main commercial activity involves buying business property to rent out then commercial mortgages set up on an interest-only basis may be better suited for your needs. Lower mortgage payments mean you can better maximise the profits from the rental income generated from your portfolio.

In addition, your property portfolio could be used as an appropriate repayment vehicle to cover the capital element with the aim that any growth in value will adequately cover the amount you need.

Are there any potential drawbacks?

The main disadvantage is that some borrowers/businesses struggle to pay off the loan amount at the end of the term.

This is the main drawback of an interest-only commercial mortgage and it’s quite a big one. You need to be consistently reviewing the repayment vehicle you have selected for the capital element of your loan and that it is on track to cover this amount otherwise you run the risk of being unable to settle the debt.

Many businesses may neglect this part of their mortgage commitment which could result in further refinancing costs or, worst case, a lender commencing repossession proceedings.

There isn’t a definite ‘best choice’ for a business to choose either an interest-only or capital and repayment mortgage. It’s important you seek advice about all the finance options available to your specific business needs before proceeding.

Can I use an interest-only mortgage to buy commercial property that needs renovation?

Yes, that’s certainly a possibility. In fact, many businesses opt for an interest-only commercial mortgage for the redevelopment of their premises as this type of lending allows them to keep their regular costs at a minimum whilst putting their available liquidity towards the renovation costs.

Business property can appreciate in value following redevelopment in just the same manner residential property can, therefore, using your commercial premises as the repayment vehicle would be a good option for this purpose, if you intend to sell it at some stage after the renovations are complete.

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Eligibility criteria

Each lender uses their own eligibility criteria when assessing a mortgage application. For businesses, lenders will review a request on a case-by-case basis due to the nature of each commercial activity and the factors involved.

Generally, a lender will look very closely at the following areas:

Affordability

Reviewing the operating performance of a business by looking at earnings before interest, tax depreciation and amortisation (EBITDA) will give a lender a snapshot of the business’ profitability and, therefore, whether the mortgage is affordable or not.

Viability of the business

Experience in your field of business activity is really crucial here and lenders will want to understand how much you know about your industry. Most lenders will want to see the previous 2-3 years trading accounts for the business you are looking to buy or raise finance for, however, some may accept less than this.

Deposit

Most lenders require a deposit of between 30%-50% for interest-only commercial mortgages depending upon the level of risk they deem to be taking. Some lenders may consider a lower deposit if a business can offer appropriate security, however, a lower deposit may mean a higher interest rate.

Credit rating

A strong credit rating will provide huge confidence to a lender. On the other hand, a poor credit history for you or your business can cause issues with an application. However, there are specialist lenders who will consider offering mortgages to businesses that may have had problems in the past.

Repayment vehicle

The lender will need to be confident that your repayment vehicle is viable and guaranteed to provide you with an exit at the end of the term. For example, if it’s the sale of a property, they will likely assess its sellability in advance. If you are planning to use a lump sum held in your company’s savings account to settle the debt, the lender will expect to see evidence of the funds in advance.

How to get the best rates

To secure the best rates on an interest-only commercial mortgage, make sure you have as strong an application as possible. It will help your cause if you can evidence the following: a strong track record in the industry, clean credit history, a healthy deposit, a robust business and a viable repayment vehicle. If you don’t tick every box here, don’t panic – it could still be possible to get approved for an interest-only commercial mortgage.

Another way is to ensure you consult a mortgage broker who will be well versed in what lenders right across the market are willing to offer for a business looking for an interest-only mortgage.

The cleaner the application and the more lenders who are aware of this, the better terms will be on offer.

We work very closely with a number of mortgage brokers who would be able to assist businesses with their borrowing requirements. If you make an enquiry with us we will arrange for an expert to get in touch.

How to apply for a commercial interest-only mortgage

  1. First, gather all of the necessary documents, including evidence of your repayment vehicle. You can find a list of the documents you’ll need in our guide to commercial mortgages.
  2. Next, you should download all of your credit reports to make sure they’re fully up to date. Challenge any inaccuracies and request that any outdated information is removed
  3. Speak to a mortgage broker who specialises in commercial interest-only mortgages. This is a highly recommended step that can help you save time, money and potential disappointment by ensuring you find the right lender, first time

Your mortgage broker will guide you through the rest of the process from here, offering you bespoke advice, rounding up the best deals you qualify for and helping you with any paperwork along the way.

Can I get an interest-only business loan?

Yes. Business loans come in all shapes and sizes, including interest-only. Secured business loans work similarly to commercial mortgages but are usually capped at £25,000 and offer over a shorter term. There are fixed and variable rate loans to choose from, and whether you qualify for an interest-only product will be subject to status and application.

Many commercial mortgage lenders are also business loan providers, so the expert brokers in our network also have expertise about this type of finance. They can offer you bespoke advice on commercial loans, help you get the best rates on one and walk you through the application process, potentially saving you time and money in the process.

Speak to a commercial mortgage expert

If you’re thinking of applying for a commercial mortgage on an interest-only basis, your first port of call should be to speak to a mortgage broker who specialises in this area. This will know exactly which lenders are best placed to offer you a good deal based on your needs, circumstances and repayment vehicle.

If you use our free broker-matching service, you will be paired up with an advisor who has exactly the knowledge and experience you need, as well as deep working relationships with commercial mortgage lenders. Call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry so we can arrange a free, no-obligation chat between you and your ideal mortgage broker today.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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