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.
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.
The proceeds of any loan against a property such a commercial mortgage is seen by the Treasury as non taxable income. You will need to be prudent with your tax affairs and liaise closely with a tax specialist and declare your tax returns as any errors or inconsistencies can result in a substantial fine.
Again, as with residential mortgages the choices between fixed rate, variable and tracker are all available. Almost all mortgage brokers would strongly advise a fixed rate for commercial mortgages as the mortgage will remain at a stable rate over a long period of time. This can be advantageous for any SME or start up firm struggling to make a healthy profit, the last thing a business needs is a wildly ranging or increasing mortgage payment every month.
There are a range of interest rate plans to choose from when selecting a commercial mortgage. You can select the standard variable rate which goes up and down with the Bank of England base rate, or a fixed rate which will remain at a fixed interest rate for the first few years of the loan. Other types include discounted which offer a lower interest rate for the first few years, and capped which means that the interest rate cannot go above a certain interest rate.
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.
Where cost can spiral on a commercial mortgage however are the setting up and cover of a commercial mortgage, legal fees, conveyance fees and costliest of all, the various insurance premiums to be taken on. Building and contents insurance will cover any damage that could happen to either, but as commercial properties are generally quite large, it’s quite a lot to cover, therefore expensive.
Unlike your home though a commercial property could be open to the public and understanding what your legal liabilities are in terms of protecting those who use or enter your commercial property is important. If someone trips over or hurts themselves within the property who is liable if a case is brought. A good insurance company should be able to advice on these matters.
As always, you should seek out professional and impartial advice from a neutral mortgage broker or Independent Financial Advisor (IFA). Not only should you seek out independent advice, but you could find a much better deal through an independent broker than going to one of the major lenders, through a broker only deal as they’re known, you could find yourself will a lower interest rate and a more tailored commercial mortgage to suit your needs.
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