Interest Only vs Capital Repayment: Choosing for a Freehold Purchase

Two ways to pay the same loan

With capital repayment, every monthly payment blends interest and principal, so the balance falls to zero by the end of the term. With interest only, you pay just the interest each month — a markedly lower figure — and the full loan is repaid in one sum when the term ends or the property is sold.

On a £112,500 loan at 9.4% over ten years, that is roughly £1,450 a month against £880. The difference is cash the business keeps.

When interest only wins

Interest only suits a freehold purchase when cash flow matters more than amortisation:

Where freehold purchase prices are higher, the choice between interest only and capital repayment has a more pronounced effect on monthly cash flow. An interest only structure on a £500,000 commercial mortgage at current rates can reduce the monthly commitment by several hundred pounds — meaningful headroom in the early years of ownership.

• —You are refurbishing or repositioning the business in the first years
• —Trade is seasonal and you want the lowest fixed commitment through winter
• —You plan to sell or refinance the property before the term ends
• —The property is likely to appreciate — your equity grows without monthly capital payments

When capital repayment wins

If you are buying a forever business — the shop you will run for twenty years — repayment is usually the wiser structure. The debt disappears steadily, the total interest paid is far lower, and you are never exposed to finding the whole balance at the end of the term. Most owner-occupiers sleeping well at night are on repayment.

What lenders ask in return

Interest only is not simply repayment with lower payments. Lenders trade the lower monthly figure for tighter terms:

• —Borrowing is capped lower — typically 65% loan-to-value, so a 35% deposit
• —A credible exit strategy: sale, refinance, or verified savings
• —Stronger trading evidence, because the balance never reduces

For a sector-specific view of how this works in practice, see our page on Commercial Property acquisition finance and loans, including how lenders assess these deals and the areas we cover.