subject: A Beginners Guide To Commercial Mortgages [print this page] A Beginners Guide To Commercial Mortgages
Residential mortgages are very similar to commercial ones, in that the commercial premises are security for the loan. So in layman's terms, if you can't keep up with your repayments, the loan is repaid by the lender selling the property and using the sale proceeds to cover the loan amount.A commercial mortgage lender will place a legal charge on the premises or land involved. This is a document held by the land registry and details those who have a legal claim on the property. These are the people and organisations that would require repayment if the property were to be sold.In general commercial mortgage will have two constituent parts these being the actual amount borrowed plus the costs associated with borrowing, normally the interest on this amount. As with residential mortgages there are a variety of commercial mortgages on offer including straight repayment and interest only. With interest only you will be paying off only the interest with a lump sum required at the end of the mortgage term to pay of the original capital amount borrowed. Whilst a repayment mortgage will be paying of both the interest and the capital off over the period of the mortgage.In almost all cases a commercial mortgage will not be classed as a taxable income but always double check with an accountant or tax specialist to make sure you're not leaving yourself open for a broadside from HMRC or the Inland Revenue.The advantage for borrowers is that there are many different kinds of contract that they can take advantage of, so lots of different financial needs can be accommodated. The most secure deals tend to be fixed rate mortgages because they guarantee a fixed repayment over a period of time. The price of this security is a slightly higher rate of interest than a variable rate, but it makes it easier to budget as you will know what your repayments will be.Under a Variable Rate commercial mortgage you can expect you interest rate to only increase when the Bank of England base rate is changed. At the time of writing, it was still on the historic low of 0.5%, but that does not mean you interest rate will be 0.5%. The average interest rate for commercial mortgages from lenders is 3% above the base rate, so it would currently be 3.5%. But with the base rate expected to rise sharply before the end of 2011, it would not be strategically wise to take on a variable mortgage unless you are a making a very healthy turnover and don't mind a reduction in profits.As with residential mortgages, there is a penalty for early repayment on commercial mortgages. If you are in the fortunate position to pay off a commercial mortgage with a lump sum before the term of the loan is up, the bank will impose an exit charge on you. This will be included in your mortgage agreement so read it carefully before you decide on early repayment.No loan will be considered without buildings insurance. The bank or lender wants to make sure that its loan is properly secure against the threat of fire or damage. Contents insurance, whilst optional, is advisable, especially if you are operating a buy to let business with furnished properties.Liability insurance is also an important issue. Liability insurance covers legal costs if someone is hurt or injured on or inside your commercial premises. This is important because legal costs can be high if you are taken to court for an injury which occurred inside your commercial property.One of the best pieces of advice is that if you are looking for a commercial mortgage, speak to a broker who has access to deals that are not publicly available, and they can also explain in more detail about the types of commercial mortgage available so that you can make a more informed decision.
