"The interest only mortgage: those were the days!" A regular comment from business owners I speak with. Or more likely, "I'd like an interest only mortgage, are they still available?"
The simple answer is no. This is not entirely accurate, as they still exist in the Buy-to-Let world, and many business owners will have legacy arrangements still on interest only. For new mortgages, however, they are increasingly uncommon at best, and are typically only available as a 6-12month teaser to win your business.
The reality of interest only mortgages is that they are dangerous for the economy. They are linked to and provided in booming economies and further inflate an accelerating property bubble. We all know how the last one ended.
In boom times, banks offer interest only for 2 reasons. 1. As a teaser to win your business, and 2. because the likelihood of your business defaulting on the mortgage in good economic times is much lower. This is fine if booms are stable, but they are not.
A really important point to understand is that in a down-market, banks do not want to repossess commercial property, or any property for that matter. They are sat on so much stock already that has few buyers, and when stock is finally sold, often the property goes for a fraction of the market value. As a result, they have a much stronger desire to see a business 'pay it's way', and that means clearing capital and interest.
Capital & interest mortgage calculations demonstrate how strong a business actually is, and is a far reliable indicator.
If and when the UK does experience another boom (which I personally doubt will be anytime soon), it is perhaps unlikely that interest only commercial mortgages will return. As a result, business owners need to accept that commercial mortgages are on a capital and repayment basis, and factor that in to their financial forecasts.
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16 Facts At a click and a glance
1 - Why going into the High Street branch is not the best way to source a commercial mortgage, business loan, or business banking manager
2 - Brand loyalty does not pay. I'll explain why your current bank is not incentivised to offer a better deal
3 - Bank managers that understand your business do still exist, but they are not where you used to find them. Find out where they are, and how to access them
4 - The good news about Business Bank Credit policies: the criteria for assessing businesses is changing regularly, and in the main terms are improving
5 - Why your perfect borrowing history is of little relevance, and why its not personal
6 - You can profit from moving bank, right now, by accessing a much misunderstood fund, as well as improved terms
7 - Different banks like different sectors: what's happened
8 - State-owned banks: an update on where they are
9 - Privately owned banks: an update on where they are
10 - Interest only commercial mortgages: today's marketplace
11 - How a change of mindset can be of great help
12 - Why banks want to know your inside leg measurement, and why it’s not personal
13 - How to work out if a bank will lend to you, right now
14 - Debt service cover: what it means, why its important and the good news coming your way
15 - Why you may need to bank with more than one from now on
16 - If your business does not own property, nor wish to buy one, there are other, new, niche financiers available that can help with your requirements.
About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.