Interest-only mortgages for business borrowers

What an interest-only mortgage means in private lending

Search for “interest-only mortgage” and most of what comes up is about home loans: banks letting owner-occupiers or investors pay only interest for a set number of years. A private interest-only mortgage is a different animal. It is a mortgage taken for a business purpose from a non-bank lender, for a shorter period, with the principal repaid in one amount at the end.

You still sign a registered mortgage over the property, and the lender still has the usual rights if the loan is not repaid. What changes is the audience and the pace. These loans are written for businesses that need money quickly against property, and the term is set by the exit rather than a standard 25 or 30 years.

How it works

1. You borrow against property. The lender takes a first or second mortgage over real estate you own, personally or through a company or trust.
2. You pay interest only. Monthly, prepaid at settlement or capitalised into the balance, depending on the deal.
3. The principal stays the same. It does not reduce during the term.
4. You repay at the exit. A refinance, a sale or a contract payment clears the loan and the lender discharges the mortgage.

First or second mortgage

An interest-only private loan can sit in either position.

A first mortgage is the only or first-ranking mortgage on the property. It suits a clear title or a refinance where the new lender pays out the old one. See private first mortgages.

A second mortgage ranks behind an existing lender. It suits a borrower who wants to keep a cheap existing loan and borrow against the equity that remains. See second mortgages.

If you are weighing the two, our page on the blended cost of a second mortgage shows how the arithmetic often favours a second mortgage.

Who uses them

• Trading businesses bridging a tax bill, a supplier payment or a contract.
• Property investors buying, renovating or refinancing as part of a business.
• Company directors using a personal or company-owned property as security for a business need.
• Farmers and rural businesses borrowing against land.

In every case the loan must be for a business purpose. The borrower signs a declaration to that effect, explained in our guide to the business purpose declaration.

Credit and documents

Private interest-only mortgages usually do not turn on your credit score. A default, a judgment or a tax debt can be accepted if the property and exit are strong. Because the lender does not need years of financial statements or a formal valuation up front, the process is quick: same day is possible for first mortgages with a clear title, and days for most others.

The costs to watch

• Interest. Paid monthly, prepaid or capitalised, and each changes how much cash you receive.
• Establishment and legal fees. Usually deducted at settlement.
• Minimum interest period. You may owe several months’ interest even if you repay early.
• Discharge fee. Payable when the mortgage is released.

The only sensible measure is the total cost in dollars to your expected exit. Use our caveat loan calculator with the figures from your offer.

The risk of an interest-only mortgage

Because the balance does not fall, the whole amount is due at the end. If the exit fails, you face a large payment with no cushion. Plan the exit before you borrow, evidence it and leave a buffer. The guide to exit strategies lenders accept explains how.

Longer term or shorter term?

For a short, urgent need, a fast private mortgage is usually the best fit. For a planned project with a clean credit history and a city property, a longer-term private loan may cost less. Both can be interest-only.

A worked example

A small manufacturer wants to buy a neighbouring warehouse for expansion. The purchase settles in three weeks, but the bank’s loan for the longer-term plan will not be ready for several months. A private lender takes a first mortgage over the new warehouse on an interest-only basis for twelve months, deciding on the property and the exit rather than the manufacturer’s credit file. The manufacturer pays interest, completes the purchase on time and refinances to a bank loan once the next two quarters of accounts are lodged. The structure kept the deal alive without forcing a long-term decision on a short-term problem.

Questions worth asking

Ask whether the lender requires a formal valuation, whether the first mortgagee must consent, how quickly the lender can settle once documents are signed and what would trigger a default. A lender that explains these plainly is easier to trust than one that glosses over them.

Start your enquiry

Tell us about the property, the amount and the exit. There is no credit check when you first enquire, and a person on our desk will explain the options in plain dollars. Start your enquiry.