Interest-only, part-and-part and capital repayment
A capital repayment mortgage reduces the balance owed with every payment, so it is fully repaid by the end of the term. An interest-only mortgage leaves the full capital outstanding throughout. A part-and-part mortgage splits the loan between the two, repaying some capital while keeping payments lower than a full repayment loan.
Repayment strategies lenders accept
- Sale of the mortgaged property, or another property, at the end of the term
- Refinancing onto a new mortgage, subject to meeting the lender's criteria at that time
- Using proceeds from the sale of the underlying business, where relevant
- Other investments or savings earmarked for the purpose, evidenced to the lender's satisfaction
Lenders will typically want evidence that your chosen strategy is credible and realistic, not simply an assumption that values will rise or that refinancing will always be available.
Cash flow and DSCR
Even on interest-only terms, lenders assess whether the ongoing interest payments are comfortably covered by rental income or trading cash flow, often using a debt service coverage ratio (DSCR) or interest cover ratio (ICR). Lower monthly payments do not mean a lower bar for affordability assessment.
LTV and term
Lenders may apply a lower maximum loan-to-value to interest-only lending than they would to capital repayment, to reduce their exposure given the capital remains outstanding. The term length also affects how much the property or business may need to change in value, or how much the business may need to grow, to support a successful exit.
Owner-occupied vs investment
Investment property lenders may be more comfortable with interest-only, because rental income is a recognised source of eventual refinancing capacity. Owner-occupied lenders may ask more detailed questions about how a trading business plans to repay the capital, since the business itself may not have an obvious exit route like a sale of the property.
Worked comparison: illustrative, with assumptions stated
Illustrative example — not a quote or available deal
What happens at the end of the term
Balloon payment
The full capital balance falls due at the end of the term, sometimes called a balloon payment. You need a credible plan for meeting this well before the term ends.
Refinancing risk
If your plan relies on refinancing, bear in mind that lending criteria, property values and your own circumstances may have changed by the time you need to refinance, and there is no guarantee a new loan will be available on acceptable terms.
Selling
If your plan relies on selling the property or business, market conditions at the time of sale will affect how much is realised, and a sale may take longer than anticipated.
Questions to ask first
- What exactly is my repayment strategy, and how confident am I in it?
- What happens if that strategy doesn't work out as planned?
- Would a part-and-part structure reduce my risk while still lowering monthly costs?
- How will my circumstances likely look at the end of the term?
Who provides the advice and how it is paid for
Commercial Services are referred to a third party. Neither The Mortgage Genie nor PRIMIS are responsible for the service received.
The Mortgage Genie does not provide commercial mortgage advice. Our team will discuss your requirements and, where appropriate, identify a suitable partner adviser. We will explain who they are and obtain your permission before sharing your details.
We do not charge for commercial mortgage advice, because we do not provide it. The specialist will disclose its own fees and how it is paid before you decide whether to go ahead.