Commercial Mortgages

Unless you are very wealthy, starting a business usually involves acquiring a mortgage. A commercial mortgage is a loan secured against a commercial property. This type of mortgage is used to finance a property purchase for business ventures. For commercial mortgages, the maximum term is normally twenty years.

Advantages

Most commercial lenders will normally provide financing up to 85% of the value of the property. With a commercial mortgage, customers can usually negotiate a fair down payment as well as a flexible repayment plan. Because an investor has a claim to the percentage of property ownership, a commercial mortgage lender is often considered a better choice. The lender only has claim to property, not the business itself. A lender can only foreclose if you fail to make the mortgage repayments. Because of the many commercial products available on the market, many lenders will compete to offer the most accommodating and affordable commercial mortgage. Another important advantage is if your business increases in value, you will profit. As well, the interest payments that you make are tax deductible.

Disadvantages

Because a commercial mortgage lender has a legal claim over the property, if you fail to make repayments, the lender has the contractual right to foreclose. The lender can then sell the property to recover the money owed. It is recommended that you negotiate a written clause that will include a set time period to remedy a default before foreclosure comes into affect.

Commercial Interest Rate

There are two types of mortgages that most lenders offer:

Commercial Fixed Rate - Includes a set interest rate for a fixed period of time. Once this period ends, the normal variable rate is paid. With a commercial fixed rate, if you pay the mortgage off early, you may incur an early redemption charge (ERC). It is recommended that you take out a fixed rate mortgage that includes a no penalty clause for extra payments.

Commercial Variable Interest Rate – Interest rates that adjust to the Bank of England's Base Rate. The advantage of a variable interest rate mortgage is that you save money when the market rate increases. The disadvantage is that you are not covered if the market rate decreases.

Mortgage Deposit

Lenders often view mortgages with larger down payments as more secure. Most lenders typically like to receive 20% to 30% of the purchase price as a down payment. You will most likely have to pay a higher interest rate to compensate for a smaller down payment.

Considerations

Be prepared to show how and why you can repay the mortgage because lenders will base their decision on your ability to repay. Also, the lender will arrange for an appraiser to assess the property and its estimated market value. This helps the lender determine if the property has solid collateral. It is always a wise decision to consult with a commercial mortgage specialist before signing an agreement.