What is the reason that commercial mortgages are structured as interest only?
Commercial mortgages come in a variety of packages. One of these is an interest-only package that has allowed millions of people to acquire property some of whom would have otherwise not been able to afford. This type of lending was in the past met with a lot of criticism which led to the plummeting of its popularity.
Why Take an Interest-Only Mortgage
Interest only mortgage loans are designed to allow the borrower to only make monthly payments on the interest initially, and once they have completed this, then they can pay the capital. Since the borrower does not pay off the capital debt at the beginning, the monthly payments are lowered considerably.
After completing the interest-only payment period, a borrower can refinance the capital afar cheap interest. This makes this product attractive to many people since they are comfortable with the monthly payments.
One may also chose an interest-only mortgage package for better cash flow. Your principal and loan will continue to show more profit and the cash flow will remain positive throughout the period of loan repayment.
An interest-only mortgage loan package can give the borrower more ample time to get finances for the capital. Since you will be making small monthly payments on the interest, you can consolidate all the profit from the business and your other sources so that you pay off all your capital at once. The repayment term for interest-only loans don’t have to be as long as those for fully amortized loans especially for borrowers who take up this option when they already expect a huge sum from a certain source.
Demerits of Interest-Only Mortgage
Unlike fully amortized loans, your must produce complete evidence of a repayment strategy. Unless you are able to prove without a doubt that you will be able to pay off the capital once you finish paying off the interest, you may not be approved for interest-only mortgage.
Another hurdle for interest-only loans is the large deposit that a borrower is expected to stump up. The interest rates for this type of loan can also be higher than that of amortized loans as they are branded “high risk”.