Structure5 min read
Your balloon is not a detail
A twenty-five year schedule with a seven-year maturity leaves most of the loan outstanding at the end. That number belongs on the first page of the term sheet, not the fourteenth.
Residential borrowers rarely meet a balloon. Commercial borrowers meet one on almost every conventional loan, and the mismatch between the amortisation schedule and the maturity date is the defining feature of the instrument.
The mechanics are simple. Your payment is calculated as though the loan runs for twenty-five years. The loan itself matures in five, seven or ten. On maturity, whatever has not amortised is due in a single payment.
| Term | Amortisation | Share of the original loan still outstanding |
|---|---|---|
| 5 years | 25 years | about 89% |
| 7 years | 25 years | about 84% |
| 10 years | 25 years | about 75% |
| 10 years | 20 years | about 63% |
Why lenders do this
Because they are funding twenty-five year assets with deposits and debt that reprice far sooner. The balloon is how a bank transfers interest-rate risk to the borrower. That is not a scandal, it is the structure of the market — but it does mean the risk has an owner, and the owner is you.
Three ways the balloon actually bites
- Rates are higher at maturity, and the refinanced payment is materially larger than the one you have been making.
- Values have softened, so the new loan sizes smaller than the balance and the gap needs cash.
- Your lender has left the property type. This is not hypothetical: appetite in small office has moved twice in five years.
What to do about it
First, know the number. Not the percentage — the dollars. A borrower who can say "one point one million comes due in March 2033" makes better decisions than one who remembers a seven somewhere in the document.
Second, weigh the twenty-five year fixed second on an SBA 504 properly. Roughly forty percent of the project on a fixed rate that runs to full amortisation removes a large share of your maturity risk permanently. That is worth real money against a conventional loan that reprices every seven years, and it is frequently the deciding factor rather than the headline rate.
A balloon is not a problem. A balloon nobody has diarised is a problem.
Third, negotiate the prepayment structure at term sheet, when you have leverage, rather than at year six when you do not. Step-down penalties are common and negotiable. Yield maintenance on a low-rate note can be large enough to make an otherwise sensible refinance uneconomic — which is exactly what the break-even calculator is for.