A commercial mortgage is probably the best way to finance the purchase of buildings and land for business purposes, it provides the most flexible and affordable finance solution. Commercial mortgages are specialised due to the fact that the lender has a legal claim over the property until the loan has been repaid in full.

Remember when arranging a mortgage; always consider its effects on your cash flow and assets. This section will give you a general overview about Commercial Mortgages but it doesn’t replace professional advice in any way. You should always consult your accounting and financial advisors before finalising a loan to get the maximum benefits and avoid any complications.

How Commercial Mortgages Work
Mortgages are structured several different ways but the two important aspects to consider are the interest rate and the repayment schedule for the mortgage.

The two interest rate options are

• Commercial Fixed Rate:
  Features a set interest rate for a fixed period of time. Once this period has ended the normal variable rate is paid. Arrangement fees are normal when taking this type of mortgages.
• With a commercial fixed rate you may incur an (ERC) early redemption charge, this may extend beyond the fixed rate term. For example the fixed rate may only apply for 3 years but the penalty period may be an extra 5 years during which you must pay the variable rate of the lender.This practice is widely frowned upon and many providers now offer fixed rate mortgages with no penalty for extra payments or amendments to the agreement once the fixed rate period has ended.

  People tend to choose a fixed rate mortgage when they expect interest rates to rise or need to stabilise their monthly payment amount.

• Commercial Variable Interest Rate:
  The variable interest rate is an interest rate that mirrors and changes to the Bank of England’s Base Rate. The current market rate and a set premium that remains uncharged throughout the mortgage constitute the interest rate for each period. Remember that you can initially get a lower interest rate on variable interest rate than on a fixed rate mortgage.The advantage of a variable interest rate mortgage is that you save money when the market rate decreases. The flip side to this is that you are not covered from an increase in the market rate. This simply means the interest rate you pay will increase with the market rate.
• Mortgage Repayment Plans
  When deciding on your repayment plan you should always remember the longer you take to payback the principal the higher your total interest payment will be.
• Commercial Equal Payments
  Possibly the most common plan, this type of mortgage requires you to make a set number of equal payments. Part of each payment covers the interest and the rest reduces the principal.
• Commercial Equal Payment with a Final Balloon Payment
  Requires a set monthly payment of the principal and interest for a relatively short period of time. After you make the last payment, you have to pay the balance in one full payment, called a balloon payment. Most lenders will give you the chance to refinance the mortgage to help you stretch out the final balloon payment. This type of mortgage has many benefits. Because of the lower monthly payments during the course of the mortgage you can keep more cash available for other needs. But don’t forget the big balloon payment waiting around the corner.
• Commercial Interest-Only Payments with a Final Balloon Payment. With this type of mortgage, your regular payments only cover the interest. The principal stays the same as above

Advantages and Disadvantages of Commercial Mortgages

• Advantages:
  Retain Ownership:
  Instead of raising funds by selling a share in the property or the business to an investor, you retain complete ownership. The lender is only entitled to an interest return on its mortgage, not a percentage of ownership that an investor would expect. Also they can only exercise the right if you default on payment. You retain all the benefits of ownership in an asset that has the potential to increase in value.Tax advantage
  Interest payments on your mortgage are tax deductible and are made with pre-tax money.

  Better Cash Flow
  A mortgage gives you access to capital that you would not normally have access to with minimal up-front payments and the flexibility to design a repayment plan that suits your needs.

  Simplified cash flow management
  Mortgage schedules are at preset, making cash management more predictable.

Disadvantages:

• Collateral
  The nature of a mortgage requires you to pledge the purchased property to the lender. If you default on the mortgage, the lender is able to foreclose the property and sell it to repay the outstanding money owed to them. Make sure when the mortgage is repaid; the lender is obligated to release the mortgage and is required to make available any government files acknowledging this release.Defaults
  The lender may define a variety of events that will constitute a default on the mortgage, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the mortgage agreement. Try to negotiate an advanced written notice of any alleged default, with a reasonable amount of time to cure the default.

  Risk
  Commercial Endowment that the pension product or Individual Savings Account needs to receive enough funding and growth to pay off the mortgage at the end of the term, this is a risk.

Read the Small Print

• Mortgage fees
  The lender can charge up-front loan or processing fees. Check these fees very carefully, and get an estimate as soon as possible to help you evaluate the mortgage package.
• Prepayment
  Ideally you want to be free to pay off the mortgage at any time before it’s final date. The majority of lenders are likely to charge a redemption penalty in the first 3 to 5 years of the mortgage. After that initial period, you should make sure that your mortgage agreement gives you the right to avoid a prepayment penalty for paying off the mortgage or part of the mortgage early.
• Grace period
  Get a grace period for any payments. Say for example, the monthly payment is due on the first day of each month, but it won’t be deemed late until the fifth day of the month.
• Legal and Professional Fees:
  Before you finalise your purchase and ownership of the property passes to you, you will incur a number of costs. Common expenses to be paid are title insurance, survey fee and various fees for preparing any legal documents.

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