An interest-only term can be a great way to manage cashflow liabilities in the vast market of commercial mortgages. Using an interest-only mortgage may be your best course of action, whether you want to improve an existing commercial property, invest in a new one, or start your own business.
Continue Reading to learn more about how these loans operate.
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How Does An Interest Only Commercial Mortgage Work?
How Does An Interest Only Commercial Mortgage Work?
On a £300,000 interest-only mortgage charging 5% over 20 years, you’d repay £1,250 a month, equating to £250,000 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 £300,000
Advantages of Interest Only Commercial Mortgages
Reduced Regular Payments
This reduces the strain on cash flow and frees up more working capital for other business activities because the monthly payment only covers the interest that must be paid on the loan.
Flexible Terms For Repayment
You can choose to repay the capital as and when best suits your business with interest-only commercial mortgages. For instance, you might decide to repay the initial debt amount in stages that are consistent with your cash flow if you typically receive the majority of your income at specific times of the year.
Property Investment Suitability
Interest alone may be the best option if your commercial mortgage is used to finance investments in rental property. You can use the profits from your rental income to leverage the lower monthly payments, and you can sell the property at the loan's end to pay back the capital while keeping any value increases.
Disadvantages of Interest-Only Commercial Mortgages
Having a reliable and stable means of repayment for the capital borrowed is the most important factor to take into account. You must have made sufficient provisions to be able to repay the debt when the mortgage term expires and the full original borrowing becomes repayable.
What Is The Eligibility For An Interest Only Commercial Mortgage?
Depending on the circumstances surrounding your investment and your business situation, each lender will have their own requirements, what they can offer, and the terms they will be subject to,
Factors lend look at are:
For a mortgage lender to be able to offer funding, affordability must be taken into account.
Your EBITDA figure or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance and what the lender will consider when determining whether to grant you a commercial mortgage.
Business Trading History And Finances
A lender will need to determine your company's stability and whether you have the necessary experience to successfully repay your loan.
Typically, this will involve a review of your accounts over the previous two to three years, as well as occasionally more in-depth information about your current business strategy.
Depending on how much you are borrowing and the other factors in your application, the majority of lenders will look for deposits between 30 and 50 percent.
The Loan to Value rate will have an effect on the rates offered depending on how much you borrow versus the property's value or your anticipated rental income.
You might be asked to add more security against the lending if your deposit is lower, which results in a higher interest rate.
Directors Credit Rating
Your lender will be able to determine whether you have a history of having problems with repayments based on your credit history and how likely it is that you will pay your debts on time.
You'll probably find that fewer lenders will accept your application if you have a bad credit history, whether you run your own business or have one.
Give a commercial mortgage loan broker a call in this situation. Accelerated Finance are experts in specialized mortgages and requirements, so we can assist you in getting lenders who are willing to accept this kind of commercial mortgage application to offer you competitive rates.
Exit Plan: How Do You Intend To Pay Back The Loan?
One of the most crucial requirements for interest-only mortgages is to show that you have the necessary repayment structure in place to pay back the initial loan.
If you have savings, this could be a cash payment, the sale of the mortgaged property, or it could involve another asset or investment strategy. Before receiving your mortgage offer, you should anticipate being asked to provide proof of this repayment plan.
Which Lenders Offer These Mortgages?
Banks, building societies, and niche lenders are embracing this product and will be known to a good broker with extensive contacts and market access.
Accelerated Finance collaborates with each client to create a strong application from the beginning making sure it meets lenders' requirements. We are experts in securing commercial mortgages at competitive rates that are tailored to specific borrowing requirements whether interest only or repayment. Have a look at some of the lenders we work with and receive a fee-free quote today.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties.
Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract. Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.