If you’ve been pondering a business plan and wondering how you can finance a commercial property purchase, you might have come across interest only commercial mortgages.
The prospect of only having to pay the interest of the loan until the end of the mortgage term, when the full balance will be payable, can appeal to those who might not be in the position to make larger repayments but feel secure in the fact that they can pay off their loan later down the line.
As with any financial product, there are pros and cons, so this guide aims to provide the information you need to make an informed decision and hopefully save some time and money along the way.
What is an interest only commercial loan?
Similarly to a repayment commercial mortgage, this type of finance is usually sought to
buy a business premises, however, a key difference is that borrowers repay their loan in full at the end of the term as opposed to making capital repayments each month.
What would be payable monthly, is the interest of the loan which would be significantly less than repayments for the loan itself.
How does an interest only commercial mortgage work?
On a £200,000 interest-only mortgage charging 3.5% over 20 years, you'd repay £584 a month, equating to £140,129 of interest over the 20 years.
Once the 20 years are up, you would have to repay the capital of the loan which would be the original £200,000.
What are the pros and cons of an interest only commercial mortgage?
- Lower monthly repayments
- Potential flexibility to repay when it’s suitable for you
- Potential to maximise rental profit, if you’re planning on renting out the commercial building to other businesses
- The lower repayments could allow borrowers to free up funds to make renovations and increase the value of the property.
- The full loan amount is repayable at the end of the mortgage term and for some borrowers, this can be daunting.
- Borrowers need to plan how they’ll repay the debt, perhaps through savings or through the profits of their business. Without an exit strategy, borrowers could face defaulting on their mortgage which could lead to repossession and bad credit.
How much deposit do I need for an interest only commercial loan?
Deposit requirements vary heavily depending on the lender you choose and your own circumstances. A typical deposit size could range between 25% to 40% for an interest only commercial mortgage. For example, for a commercial property valued at £200,000 a 25% deposit would be £50,000.
However, there are a handful of UK lenders offering LTVs (loan-to-values) of 90% of the property value, meaning that in exceptional circumstances with a very “clean” application, it could be possible to obtain a mortgage with just a 10% deposit.
Find out how much deposit you can expect to pay for an interest only commercial loan with our experts. They can run through the factors that affect how much you’ll be required to front and can advise you on the areas that you could improve to potentially reduce the amount you need.
Am I eligible for an interest only mortgage?
Most UK lenders will assess the below areas when deciding whether or not they can lend to you, as well as how much and under what interest rate.
- Your business plan and profit projections
- Deposit size
- Credit rating
- Your exit strategy i.e. how you plan to repay the loan
- Your experience within the business sector you plan to operate in
Usually, though not always, the higher the perceived risk of the borrower not repaying the loan, the higher the chance of rejection.
Some lenders charge higher rates of interest to borrowers who are deemed riskier i.e. they have a lower deposit or bad credit and some cap the amount of mortgage they will provide to mitigate the risk of greater financial loss.
Can I get an interest only commercial mortgage if I’ve been rejected in the past?
It’s helpful to know that even if one lender has rejected your interest only commercial mortgage application, it doesn’t necessarily mean that your hopes for buying a business premises are over.
Lenders each have their own set of criteria that they use to assess on a case by case basis. That means that while one may have issues with lending to borrowers with no past experience, another may specialise in interest only commercial loans for start-ups.
This can make the search for a good loan seem tedious, afterall, you just want to know how much an interest loan will cost you, under what terms and whether or not you’ll be approved.
Where can I check my eligibility for free?
That’s where we come in. Our advisors have access to hundreds of commercial mortgage lenders right across the UK and can check your eligibility for you, with various yet appropriate lenders.
This can narrow down your search and highlight the best options, saving you time but more importantly, helping you to avoid any nasty credit rejections on your credit report.
The reason this is important is because lenders will look at your credit score closely when deciding if you’re a reliable borrower. More recent or severe credit issues can cause red flags for most lenders, so keeping your report squeaky clean is a great idea if you’re about to apply for any type of credit.
Where can I seek advice?
There’s lots to consider before deciding to proceed with an interest only commercial loan and speaking to someone with experience in the market and an understanding of where the most affordable loans can be found, can help you make the right choice for you.
We have advisors in store who are more than happy to help and provide practical information to guide you through what can sometimes feel like a maze of mortgages.
Give us a call or if you’d prefer, use our contact form to let us know about your plans along with any niggling questions you have.