Interest only commercial mortgages explained
An interest only commercial mortgage can help a business or property investor keep monthly costs down.
This can mean the total cost of a mortgage can be higher than a capital repayment mortgage.
This is because the capital is not being paid off over time, reducing the interest, it’s paid off at the end of the mortgage term in full.
What is a commercial interest only mortgage?
When a client takes out an interest only commercial mortgage, they only repay the interest each month for the term of the mortgage.
For example, if a client borrows £500,000 for a property, they will pay back the interest on this £500,000 each month.
At the end of the agreed term, the buyer must repay the full £500,000 using a method agreed with their lender when the mortgage was taken out.
Why do clients choose interest only?
The main reason a client may choose an interest only commercial mortgage is lower monthly payments.
This could help them to:
Improve cash flow in the short to medium term.
Keep money available for day-to-day costs.
Pay for repairs or improvements.
Support business growth.
These benefits must also be balanced with:
Often a higher overall cost compared to a capital repayment mortgage.
Ability to repay the full amount at the end of the term.
Can a mortgage be half repayment and half interest only?
Yes. YBS commercial mortgages offers some mortgages as half capital repayment and half interest only.
Other lenders may also allow a commercial mortgage to be split between repayment and interest only. This is sometimes called a part-and-part mortgage.
Each month, the borrower repays capital and interest on the first half, while paying interest only on the second half.
Why a client may favour a half and half mortgage
Lower monthly repayments than a full capital repayment mortgage.
Smaller lump sum to pay at the end compared with a full interest only.
The lender will still need a clear plan for repaying the interest only part. The exact split available will depend on the property, affordability, loan size and the lender’s criteria.
Who can choose to take out an interest only commercial mortgage?
These mortgages may be available to:
Commercial property investors
Limited companies
Special purpose vehicles
Portfolio landlords
Property developers.
Every lender sets its own rules. Most will look at the client’s experience, income, property, deposit and repayment plan. A strong application clearly explains why interest only is suitable and how the debt will be cleared later.
How is the loan repaid?
The lender will usually ask for a realistic repayment plan before approving the mortgage. Common options include:
Selling the property
Selling the property and using the proceeds to repay the capital. The expected sale value should be enough to repay the mortgage and selling costs.
Refinancing
The borrower replaces the existing mortgage with a new loan. This depends on future property values, income, interest rates and lender criteria, so it should not be treated as guaranteed.
Selling another asset
A client may plan to sell another property or investment. The lender may ask for evidence that the asset exists and that it will cover the capital owed.
Using business funds
A business owner may plan to use future profits, profits from selling the business, or business savings. Lenders will normally test whether this plan is realistic.
Can interest only be used for an investment property?
Yes. It is commonly used for offices, shops, warehouses, industrial units, mixed-use buildings and other commercial investments.
Investors may prefer it because more rental income remains available after the monthly mortgage payment.
Interest only commercial mortgages: FAQs
Is an interest only mortgage cheaper?
Monthly repayments are lower, but the overall cost can be higher as interest is paid on the full balance for longer.
Can a client switch to repayment later?
This will depend on the lender, the mortgage terms and if they can afford higher monthly repayments.
Can limited companies use interest only?
Yes. A lender may consider limited companies and special purpose vehicles. We offer interest only options on our limited company buy to let products.
Do all commercial lenders offer it?
No. Availability and terms vary, which is why lender selection and a well-prepared application are important.
Can a business use it to buy its own premises?
Yes. Some lenders offer interest only or part-and-part options for owner-occupied premises. They will usually review the business’s trading record, affordability and repayment plan carefully.
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