The Five Pillars Of Every Commercial Mortgage

Any entrepreneur looking to buy their own premises or investors looking to add commercial property to their portfolio, will need a commercial mortgage. Business loans and commercial mortgages are created to assist businesses and individuals raise the capital needed to buy warehouses, offices, shops and factories or other commercial premises.

There are some similarities between the two types of mortgages - lenders will tend to offer a sum of money based on the the property you buy, it will act as security in case of default. However there are some fundamental differences. This easy to follow guide highlights the top five facts everyone should know about commercial mortgages.

1. Deposits for commercial mortgages are higher than for normal home loans: When you decide to purchase a residential property, you will normally have to put down a deposit of at least 10-15 per cent of the asking price. Depending on how risk averse the lender is, will determine whether or not they will require higher deposits, particularly to secure the very best interest rates. Lenders may take into account all manner of personal circumstances before they calculate the size of deposit they will require.

When you are taking out a commercial mortgage, the rules are different. It is quite common for a buyer to have to offer between 30 and 40 per cent of the purchase price, this is a reflection of the increased risk that the banks feels it is being exposed to (as we all know, banks are increasingly risk averse these days). Investing in commercial property may therefore require you to commit a significant amount of your own cash.

2. You may need to provide a personal guarantee: Sometimes cash deposits are not enough to completely satisfy a commercial lender. Mortgages for business purposes are available to individuals, partnerships and to companies. If you are looking to borrow in the name of your business (for example to buy office space) it is possible that the directors of the company will have to offer 'personal guarantees' to a lender. This inevitably results in directors being required to step in and make payments to the commercial mortgage should the business fail to keep up the payments, and often placing their homes up as surety on the loan.

3. Commercial Mortgage Payments Can Be Tax Deductible: Not the whole payment will be deductible of course, but HMRC will class the interest payments of the mortgage tax deductible, the capital part of the payment will not be. A major bonus when it comes to filing the tax returns for the financial year!

4. Lower Rates: Anyone how has ever run up a credit card will know that secured loans are cheaper than unsecured ones. Borrowing for business purposes is always cheaper if it is being done through a commercial mortgage. One key advantage of the commercial mortgage is the interest rate. They are normally charged ata a rate lower than other forms of credit. This is because the lender has the security of the property as collateral.

Consolidating other business borrowing that may be charging much higher interest rates can therefore save you money. Lots of firms use a commercial mortgage to repay other, more expensive, funding.

5. They Are Structured Differently From Commercial Mortgages: Commercial mortgages are more complex arrangements and can take much longer to finalise than residential. On top of this the option of mortgage types is also limited, for example lenders who will authorise a interest-only commercial mortgage are very rare, while they are more common for residential mortgages, especially buy to lets. The only option available on an interest only basis would be one that lasts one or two years before being required to revert to a capital mortgage repayment plan, this option is usually to help a business find its feet and establish itself. If you can make that argument, you might be successful in persuading the mortgage lender for a temporary interest only repayment structure.

Also, many commercial mortgages are set up on a 'quarterly payment' basis, reflecting the business year. This means that interest payments are calculated every three months rather than on a normal monthly basis.


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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.