Ever heard of interest only commercial mortgages and wondered what it means?
In this blog, we're breaking this down so you can understand what it is and whether it might be a good option for you.
What is an interest only commercial mortgage?
An interest only commercial mortgage is a loan designed for buying business properties, such as warehouses, shops, or offices. With this type of mortgage, you only pay the interest on the loan for a specified term.
During this period, your monthly payments are lower since they don't include repayments towards the actual loan. Once the term ends, you repay the loan amount in full.
While this can be useful for reducing your monthly expenses, it requires you to repay the entire loan at the end of the term. If you don't, you won't own the property.
How do interest only commercial mortgages work?
They operate similarly to capital repayment mortgages. However, there is one key difference: you only pay the interest each month, not the loan. At the end of the term, you must repay the loan in full.
Therefore, it's crucial to make sure you can repay the loan at the term's end and have a clear exit strategy to do this.
What are the benefits of a commercial interest only mortgage?
There can be many benefits to this particular option, some of these include:
Lower monthly payments
The primary advantage is lower monthly payments, as you are only paying the interest and not the loan balance. This can be beneficial if you need to minimise your monthly expenses.
Boost to your monthly income
If you rent out the commercial property to another business, the rental income can cover the payments, and any surplus can be kept as profit. This can serve as an extra income stream, providing you with more cash to use.
What are the risks of a commercial interest only mortgage?
As with any financing option, there are risks to consider before applying.
Lump sum repayment at the end of the term:
When the mortgage term ends, you need to repay the entire loan to own the property. This can be risky if you don't have a clear repayment plan and are unsure about making such a large payment. It's important to have a solid strategy in place because it's a large amount to pay at once.
Risk of property repossession
Since the loan is secured against the property, failing to make your payments could result in repossession. The lender can take the property and sell it to get back the loan amount. This risk shows how crucial it is to make sure the loan payments are manageable for you. Repossession can be serious, especially if your business operates from the property. For instance, if you run a shop there, losing the property means losing your business location.
Stable income is needed
Like any loan, having a steady income is essential to manage payments. If your business income varies, especially due to seasonal changes, it can pose challenges. So, it's important to make sure that it is affordable for you before proceeding.
What are the interest only commercial mortgage rates?
Interest only commercial mortgage rates can vary widely based on several factors. One of the factors is the lender you choose, as each lender offers different mortgage products. This means that shopping around and comparing offers from multiple lenders is key to finding the best rate.
Another factor is the Bank of England base rate. When the base rate is increased, often to control inflation, interest rates on commercial mortgages rise. On the other hand, when the base rate is low, interest rates on mortgages are lower.
Finally, lenders also assess the risk involved in lending to you. They will consider your business's financial health, the type of property being bought, and your credit history. The greater the perceived risk to the lender, the higher the interest rate you will be charged.
What is the eligibility criteria?
Lenders review your deposit size when buying a property. A bigger deposit can increase your borrowing amount and may lead to better interest rates. Additionally, it lowers the lender's risk, improving your chances of approval.
Lenders also check your credit history to assess your suitability. A positive credit record shows your ability to handle financial responsibilities. However, a less-than-ideal credit history could suggest challenges in meeting financial commitments.
Additionally, lenders may consider factors such as your business's financial health and your repayment plans.
Eligibility criteria can vary between lenders, meaning approval may differ from one lender to another. Therefore, careful research before applying for any products is vital.
Frequently asked questions
Can commercial mortgages be interest only?
Yes, they absolutely can be interest only, which is where you will only need to pay off the interest each month rather than any of the loan. Once the term ends, you will need to pay off the loan. So, if you’re looking into this option you need to make sure you are able to do this.
Can I get an interest only commercial mortgage with no deposit?
No, it's unlikely you will be approved for this option without putting down some form of deposit. While criteria vary by lender, most require a deposit for the purchase.
Summary
Interest only commercial mortgages can be a good option for businesses. By focusing on interest payments during the term, it can lower your monthly expenses. However, it's important to weigh this against the risk of property repossession if payments are missed. Before choosing this option, make sure you have a clear repayment plan and that your income can cover the commitment.
Any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
