On taking out a commercial mortgage, just as a residential mortgage, there are two options - capital repayment or interest only.
Commercial mortgages can finance:
- Business purchases, investment and acquisitions
- Renovation and refurbishment work
- Refinancing requirements
Commercial interest-only mortgages
A commercial mortgage on an interest-only basis works just as for residential mortgages, with the monthly payments only accounting for the interest proportion of the debt.
Your business will need to have a plan in place to repay the capital element of the loan at the end of the mortgage period.
Mortgage lenders will need to know what the repayment vehicle is that you plan to use to repay the original loan amount; this can sometimes be before the end of the term, in stages throughout the mortgage term, or at the end.
Why do businesses choose interest-only mortgages?
There are lots of reasons why a commercial mortgage might be preferable on an interest-only basis. These include:
Since the monthly payment is only for the interest payable on the loan, this eases the strain on cash flow and frees up more working capital for other business activities.
With interest-only commercial mortgages, you have the option of repaying the capital as and when best suits your business. For example, if you tend to receive the bulk of your revenue at certain stages of the year, you could choose to pay back the original debt amount in stages, aligned with your cash flow.
- Suitability for investment properties
If your commercial mortgage is financing investment in rental property, then interest-only might be the most suitable solution. The lower monthly repayments allow you to leverage the profits made from your rental income, and you can resell the property at the end of the loan term to repay the capital, retaining any increases in value as profit.
Drawbacks of an interest-only commercial loan
The main factor to consider is to have a stable and reliable repayment vehicle in place to repay the capital. At the end of the mortgage term, the full original borrowing becomes repayable, and you need to have made enough provision to be able to repay the debt.
Commercial mortgages for refurbishments
A project well suited to an interest-only commercial mortgage is a property refurbishment or redevelopment. Given the lower monthly payments, any additional business revenue can be put towards the cost of the renovation, reducing the borrowing needed to finance the costs.
If the property is expected to increase in value after the refurbishment, this can be sold at a profit or mortgaged, once the development is complete. The proceeds can be used to repay the capital and the profit retained or reinvested.
Eligibility for interest-only commercial mortgages
Every lender will have their criteria, and what they can offer and against which terms will depend on the circumstances of your investment, and your business scenario.
Eligibility factors include:
- The affordability of the borrowing.
- Your business finances and trading history.
- How much deposit you have available.
- The credit history of the business and owners.
- How you plan to repay the original debt.
1. Commercial mortgages - affordability
Affordability is an essential assessment for a mortgage lender to be able to extend funding.
For a commercial mortgage, the lender will look at your business earnings before profit and other deductions such as tax - this is called your EBITDA figure.
2. Business finances
A lender will need to assess the stability of your business, and whether you have sufficient experience to be able to repay your lending successfully.
This will usually include an analysis of your accounts for the last two to three years, and sometimes more in-depth details about your ongoing business plan.
3. Commercial mortgage deposits
Most lenders will look for a deposit of between 30-50%, and this depends on how much you are borrowing and the other circumstances of your application.
For example, the LTV rate (how much you are borrowing in comparison to the value of the property, or the forecast rental income) will impact the rates offered.
If you have a lower deposit, you will typically pay a higher interest rate and may be asked to provide additional security against the lending.
4. Business credit ratings
Your credit history will help your lender to assess whether you are likely to be able to make your repayments on time, and whether you have had issues with repayments in the past.
If you have an adverse credit file, either as a business or as a business owner, you are likely to find that fewer lenders can accept your application.
In this scenario, give Revolution Brokers a call - we specialise in niche mortgages and requirements, so can help you secure a competitive mortgage from lenders who are happy to deal with this sort of commercial mortgage application.
5. Repayment method
With interest-only mortgages, one of the most important factors is in demonstrating that you have a suitable repayment vehicle in place to be able to repay the original lending.
This could be the sale of the property being mortgaged, could be a cash repayment if you have savings, or may relate to another asset or investment plan. You can expect to be asked to evidence this repayment plan in advance of receiving your mortgage offer.
Finding the best commercial mortgages
Revolution Brokers work with each client to complete a compelling and robust application, clearly demonstrating how the lenders' criteria are met. We specialise in securing commercial mortgages - whether repayment or interest only - at competitive rates matched to meet with your borrowing needs.
A broker has access to the entirety of the market and negotiates with lenders on your behalf to achieve rates that are not available on the open market.
Call us today on 0330 304 3040 or drop us an email at email@example.com.