Is Interest-Only Mortgage the Right Option When Buying Land?

“UK farmland prices reached a record high, and are set to accelerate gains despite a potential rise in the supply of land on the market, as a succession of poor harvests prompts farmers to sell up.”

This is according to Knight Frank, an independent property consultancy, on a report on Agrimoney.com. Based on this information alone, there is no doubt that land acquisition is the next big investment that you might want to consider exploring. Depending on the location, size and market conditions, property cost can range from affordable to substantially high. Regardless, it is best that you know your financing options. These can include paying for the farmland in cash, using seller financing or relying on bank or bridge financing. Or, you might want to explore the potentials of an interest-only mortgage?

How does it work?

In most loans, there are two factors that must be repaid: capital debt, which is the actual sum borrowed, and the interest. With interest-only mortgage, only the interest will be paid over a particular period, saving you money for a good long time.

What’s wrong with this financing option?

  • Because you only settle the interest, the capital debt is still outstanding. It remains intact, untouched and unpaid. This means that a bulk of what needs to be paid remains unsettled.
  • In most cases, the lender will call out the full amount of the capital debt at the end of the term. So if you borrowed £100,000, you would have to pay all of it at one time. If you were unable to save enough cash to cover for it, you risk losing the land you bought.
  • It cost more compared to repayment mortgage. This is because if you fail to pay back the capital debt, an interest on the entire loan for the entire term will be charged to you, which basically doubles the loan amount.

But an interest-only mortgage is not all that bad. Provided that you don’t forget the capital debt and save up for it from the day you start paying off the interest, you won’t lose the property that you acquired from the loan. Besides, this is one of the financing options that allow you to stretch your funds until your income improves for the better.

Now that you know the real score on this type of loan, get in touch with a provider of buy-to-let UK farmland.

For additional information, check these resources that we have gathered: