Partially Amortising Loans
For larger loans the banks may offer ‘Partially Amortising Loans’ (PAL). In essence when you borrow money for a 15 year term this is classed as a fully amortising loan, i.e. the loan is spread over the whole of the 15 year term. However, as the commitment of the borrowing is over a longer period this can lead the cost of the borrowing to be more expensive. However if the commitment of the loan was over a short period, e.g. 5 years, then the borrowing cost to the bank would potentially be cheaper and as such they can offer a lower interest rate.
A recent example when writing this was for borrowing of £1,200,000 of borrowing
15 year term fully amortising loan – interest rate of 2.25% above base rate
5 year partially amortising loan – interest rate of 1.49% above base rate
Whilst borrowing £1,200,000 over a 5 year term is likely to make the monthly repayments too high and unaffordable, the banks will actually still spread the cost as if the loan is over a 15 year term. However this then leave a balance to be repaid at the end of the 5 year term.
What happens at the end of the term?
At the end of the PAL you would need to reapply for the loan or find an alternate bank. We have undergone this process with clients on many an occasion and it is often a simple case of providing updated accounts, financial information and then securing a new borrowing. It should be noted however that there is no guarantee that the bank will re-lend. This should not be viewed the same as when you residential mortgage rate expires and you are simply choosing a new rate. The bank will assess the performance of the loan repayments and should there have been an issue with the repayment for example they may choose not to offer to lend for the further term.
The bank may also charge new arrangement fees for the loan, and may ask for a further valuation to be undertaken.
When does a PAL work best?
The larger the borrowing amount the bigger the cost savings can be. This is important as each time you renew a PAL there will potentially be a new bank arrangement fee and the bank may require a further valuation of the practice. However, for the larger loans the extra costs can be relatively small compared to the cost savings. The smaller the loan amount the less the cost savings, and when adding the fees associated with renewing at the end of the PAL this may not be worthwhile.
Advantages
- Lower interest rates can often be offered
- Over the 5 year term (with a lower interest rate) more of the capital can be repaid, assuming monthly payment set at the same amount
Disadvantages
- There is no guarantee that a further loan can be offered after the original 5 year term
- New rates offered (after the PAML expires) may be more expensive that the original rates offered
- There may be new bank arrangement fees, valuation fees etc
When looking at finance there are a number of factors that will come into play to ensure that you get the best fit for your circumstances. At PFM Dental we arrange a significant amount of practice purchase finance. Unlike a number of other finance brokers we do not charge a fee for finance negotiations.
