A Beginners Guide To Commercial Mortgages

Commercial Mortgages in essence share the same DNA with the model of residential mortgages at the most basic level. The mortgage is secured against the actual property should you not be able to keep up with the mortgage payments. One slight difference is that the property would not be repossessed by the bank, but would be instantly put up for sale.

The lender will show that they own part of the property by applying a 'charge' against the property. This means that if the property is sold, they will be able to collect the funds to repay the remaining balance on your commercial mortgage.

Commercial mortgages are comprised of two elements. The first is the capital value of the loan and the interest that the loan accrues, based on wither a fixed or a variable rate. It is possible to have an interest only mortgage and in this case you will only repay interest for the term of the loan, and at the end of the term the actual loan itself will be outstanding and have to be paid. Just as with residential home loans, the first category is described as a repayment mortgage and part of the interest is repaid every month, as well as part of the actual loan itself. A repayment mortgage reduces over the term of the loan, an interest only doesn't

Commercial mortgage funds are usually not taxable, although it is still advisable to use the services of an accountant to ensure that all of the correct taxes are paid (by way of completing the tax returns correctly at the end of the year) to avoid being fined or accused of tax evasion.

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.

The idea of a variable rate may seem quite attractive at the moment, as the base rate of interest is at a historic low of .5% at the moment. This means that most variables are about 3.5%, which for most borrowers is an attractive figure. Be warned, however, the bank's Monetary Policy Committee is likely to start the first of several rate rises in 2011.

As with all mortgages, early payment charges will be active in any mortgage, but what rate and how much they are will vary from lender to lender. An example would be that if you somehow managed to pay off the mortgage in 10 years, you can expect a large exit fee which has to be paid in a lump sum at the end. Lenders will be losing out on years of interest for early completion, so though it will be cheaper in the long run, it's still going to be an expensive move in the short term.

Once you have your commercial property and your mortgage is in place make sure you have all the necessary insurance in place to protect your asset. As with your own home having the right insurance in place is often a requirement of the mortgage itself but can also help you sleep at night with the knowledge that if anything should go wrong you are fully protected.

Because you as a landlord have a duty of care towards anyone who sets foot on your property, you need to have liability insurance, in case anyone is injured by accident. In today's hyper litigious climate, you can be sure that if someone can't claim against your insurers, they'll claim against you.

When you are looking for a new commercial mortgage deal, go and consult a broker first. Many brokers or advisers have access to mortgage rates and 'broker' deals that the high street lenders don't deal with. Some of these deals can offer far more competitive rates and are worth pursuing, as they can make all the difference between profit and loss.


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Timothy Frodsham writes for Just Commercial Mortgages the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.