Interest-Only Period

Interest-Only Period: What the Market Actually Requires

Interest-only time is bought, not given, and each capital source prices it differently. Bridge lenders and debt funds lend interest-only by design: their loans exit through sale or refinance, and forcing amortization on a 24-month value-add plan makes no sense. Construction loans are likewise interest-only through completion, typically funded from an interest reserve built into the budget.

On permanent debt, IO is a leverage question. Agency lenders grant it on a sliding scale: full-term interest-only is generally reserved for deals at 65% LTV or below, several years of partial IO shows up in the middle of the leverage grid, and full-leverage deals amortize from day one. CMBS is the most generous market for IO, with full-term interest-only common on moderate-leverage loans because bondholders price the structure rather than a credit committee. Life companies grant IO selectively at low leverage. Banks are the most resistant, usually capping IO at one to three years, because regulators and internal credit policy want visible principal reduction.

Two underwriting details matter more than borrowers expect. First, many lenders size the loan on an amortizing payment even when granting IO, so the IO period improves cash flow but not proceeds. Second, the payment step-up when IO expires is real: a loan that covered 1.55x during the IO years can drop toward 1.25x the month amortization begins, which is exactly when a servicer starts watching the file. The common mistake is treating IO as free cash flow rather than as a bridge to a specific event. Use the IO years to fund capital plans or burn off below-market leases, and know your coverage on the amortizing payment before you sign, because that is the number the refinance market will underwrite at maturity.

Why It Matters for Your Loan

Interest-only structure is often worth more than a rate concession. On a $12,000,000 loan, full-term IO can free six figures of annual cash flow, funding capital improvements or distributions during the value-creation years of a hold. It also shifts refinance risk: no principal reduction means a larger balloon and full dependence on NOI growth at exit. Commercial Lending Solutions negotiates IO alongside proceeds and rate on every term sheet, because the three trade against each other at each capital source.