Interest Only Commercial Mortgages

If you’re buying a property for your business, it’s possible to take out an interest-only commercial mortgage rather than a capital repayment one.

Whether interest-only is right for you will depend on a number of factors including what you intend to use the property for and the strength of your company’s finances.

In this guide, we’ve gathered everything you need to know about interest-only commercial mortgages including what they are, how they work and how a broker can help you.

What is an interest-only commercial mortgage?

Interest-only commercial mortgages work in the same way as their residential equivalents in that you only pay back the interest charged on your loan each month. You then repay the full amount borrowed as a lump sum at the end of your mortgage term.

This differs from capital repayment where your monthly payments go towards paying back the interest and some of the initial loan throughout the term rather than all in one go at the end.

To qualify for an interest-only commercial mortgage, your lender will want to know how you plan to pay off your debt, so you’ll need to be able to provide evidence of a viable repayment plan.

Advantages of choosing interest-only

The big benefit is your monthly repayments will be lower than if you went for a repayment mortgage. This will leave you with more cash each month to inject into your business, which can be especially helpful if you’re just starting out.

However, there are other positives.

It could be a good option if you’re purchasing a property you plan to redevelop and sell.

The lower monthly repayments mean you’ll have more money to put towards renovations and you could use the sale proceeds to repay the initial mortgage amount.

It could also be a sensible route if you’re planning to rent out your commercial property. Your monthly mortgage costs would be cheaper and you could use the rental income to cover the cost of the total debt at the end of the mortgage term.

Finally, interest-only commercial mortgages typically give you more flexibility to make early repayments or even repay the full debt before the end of the term.

Some capital repayment commercial mortgages cap the amount you’re allowed to repay early – usually at 10% a year – which means you could end up paying more interest over a longer period, unnecessarily.

Is it right for your business?

There’s no right or wrong answer when it comes to choosing between an interest-only or capital repayment mortgage for your business.

However, if you’re leaning towards an interest-only loan, you need to think carefully about whether you’ll be able to pay back the full mortgage amount at the end of the term.

While only having to cover interest costs may sound appealing, you’ll still need to pay back the remaining capital. If you don’t, you may face additional refinancing costs or in some extreme cases you could even have your property repossessed.

Your lender will request evidence of your repayment plan, but it will fall on you to regularly make sure it’s still on track and there’s enough money at the end of the term to repay your debt.

As mentioned above, you may decide to use rental income or sales proceeds for your final repayment of the loan. But if these aren’t viable options, you’ll need another repayment vehicle in place, such as a dedicated savings account, and you’ll need to make sure there are enough funds in it to pay off your mortgage.

It’s also worth bearing in mind that you’ll probably pay more interest overall with an interest-only mortgage, if it goes full-term, as the total amount you pay in interest doesn’t decrease over time.

How a broker can help

Choosing the right type of commercial mortgage can make a significant difference to your business’s bottom line profitability. That’s why it’s always worth seeking independent advice from an experienced mortgage broker before making any decisions.

A broker who specialises in commercial interest-only mortgages will be able to assess the viability of your business and your company’s financials as well as your credit history to determine whether an interest-only loan is the right fit.

They’ll also be able to tell you which lenders to approach and which to avoid as well as negotiate bespoke deals on your behalf, get access to exclusive rates, and be on hand throughout the process to make sure any issues are dealt with swiftly.

Get in touch today and we’ll match you with a broker from our extensive network who’ll be able to advise you on what’s best for your business.

Which lenders offer these mortgages?

Interest-only commercial mortgages are deemed pretty high risk so it tends to be specialist lenders who offer these products. These lenders have specific eligibility criteria and take a case-by-case approach to their underwriting decisions.

Most specialist lenders are not accessible to the general public. They typically require a referral from a recognised broker.

Typical rates

Your interest rate will depend on your individual circumstances, but due to the high risk nature of these loans, you should currently (May 2023) expect to pay anything from 5% to 10%, depending upon how complex your application is.

Expect to pay towards the higher end of the range if you have a smaller deposit or a relatively new business with a short trading record (1-2 years).

How much could the repayments be?

Our commercial mortgage calculator will be able to give you a guide as to how much your monthly repayments could work out at.

Eligibility criteria

Each lender will have its own eligibility criteria, but in general they’ll all look closely at the following:

• Business viability. The lender will want to see you have experience in your field and assess how much you know about the industry. Be prepared to provide evidence of your business plans and projections.
• Affordability. Lenders will usually want to see the last 3 years accounts and use your business’s earnings before interest, tax, depreciation and amortisation (EBITDA) to assess whether you can afford the loan or not.
• Deposit. Deposit requirements vary from lender to lender, but you should expect to put down between 30% and 50%. A handful of lenders may consider a smaller deposit, some as low as 10%, but these deals are incredibly rare.
• Your repayment strategy.  You’ll need to provide the lender with evidence of a robust exit plan. If you’re planning to use proceeds of a property sale, the lender will probably assess the property’s sellability during the application process. If you plan to use savings, the lender will want proof the funds exist.
• Credit rating. Due to the bespoke nature of specialist commercial lending, having a bad credit history may not be a deal breaker. That being said, having a particularly poor credit history could be a red flag for lenders.

Connect with a commercial mortgage expert

If you need a commercial mortgage for your business and you’re considering going for an interest-only loan, your first step should always be talking to a broker with expertise in this niche.

The brokers in our network who have specialist knowledge of commercial interest-only mortgages can match you with the perfect lender for your circumstances. They can also review your business to make sure an interest-only loan is right for you.

Give us a call on 0808 189 0463 or make an enquiry and get matched with a commercial mortgage broker today for free. We hand-pick all the advisors we work with and rigorously vet them so you know you’re getting the best possible advice.