Pros and Cons of an Interest Only Commercial Mortgage

An interest only commercial mortgage will require low monthly payments when compared to a standard mortgage. With the interest only loan, you are not repaying any of the principal debt. You are simply paying the interest the debt has accrued in a short period. This is similar to making a minimum payment on a credit card rather than paying down the balance. Just as with failing to repay the balance on a credit card, failing to repay the principal on a commercial mortgage can be expensive and risky in the long run.

Structure of an Interest Only Commercial Mortgage

When you take a mortgage, your monthly payments are broken down into several categories. These include principal payment; interest; loan fees not paid up front; mortgage insurance, where applicable; and any late payment charges. With an interest only loan, you will still be required to pay all of these areas with the exception of principal payment. On a commercial loan, often in the millions of dollars, this could represent tens of thousands of dollars a month in savings. Instead of paying this as you go, you simply repay the principal in one lump sum when the property is sold.

Pros of an Interest Only Commercial Mortgage

The main benefit of an interest only commercial mortgage is the savings you are afforded while the loan is still active. Without repaying principal, you are responsible for only a small fraction of the costs of ownership. This can be crucial when you are just getting your business on its feet and it is not yet profitable. The savings each month may be just what you need to begin turning a profit.

Cons of an Interest Only Commercial Mortgage

The main drawback of an interest only loan of any type is the risk associated with never paying back the principal. Typically, as you make monthly payments to your mortgage lender, you begin to acquire equity in your property. When you do not repay principal, you never recover any equity. This prohibits your ability to refinance the loan, take an equity loan and otherwise use the property as an asset while the loan is active. Further, if you have to sell the property for a loss at any point, you will owe the lender 100 percent of the original loan amount, and this means you could end up paying a large out-of-pocket expense. Interest only loans additionally tend to have much higher finance fees in the interim, meaning that they will ultimately be less affordable than standard loans.

When to Secure an Interest Only Commercial Mortgage

There is always a high risk when using an interest only loan. It is unwise to pursue this option unless you have considered all the alternatives and decide it makes the most financial sense to do so. For example, if you intend on flipping a property and selling it within five years, you may think an interest only loan is wise. In this case, you will have extra cash while you upgrade the property to truly get a return on your investment.