Commercial Mortgages

A commercial mortgage is a specialised type of mortgage used to purchase property for business purposes, or finance the expansion of a business; for example, you could take out a commercial mortgage to help fund the takeover of a rival company, buy a brand new building, or buy additional land. As with standard mortgages, the loan is secured on the property and the amount borrowed repaid over an extended period of time, which can be as long as thirty years. Unlike a standard 'consumer' mortgage, the lender has a legal share in the property until you repay the loan.

Interest is charged on commercial mortgages in broadly the same way as on standard mortgages. The interest rates tend to be slightly higher than consumer mortgages, but in return commercial mortgages can be tailored to meet the exact needs of your business. In addition, the interest is usually tax-deductible, which reduces the overall cost of the mortgage. Interest is either fixed or variable. Commercial fixed rate mortgages have a specified interest rate, for example six percent, which is guaranteed for a set period of time. After this period of time, the interest rate will revert to the lender's standard variable rate, which fluctuates according to changes in the Bank of England's base interest rate.

If you take out a variable rate commercial mortgage, the interest charge will fluctuate according to changes in the Bank of England's base rate from the start of your mortgage. Essentially, the interest rate will be the base rate, plus a small extra percentage (referred to as a 'premium'), which should remain constant throughout the mortgage term. This premium is usually negotiable, which means that you can reduce your mortgage's interest rate by negotiating a lower premium. The benefit of a variable interest rate is that if the base rate goes down, the interest rate which applies to your mortgage will be reduced too, which means the cost of your mortgage is less. Conversely, if the base interest rate rises, your repayments will be higher and your mortgage will cost more.

As with standard mortgages, you can opt to remortgage. This means that if your current mortgage has a fixed interest rate that is higher that the base rate, you are able to switch mortgages to take advantage of a lower, variable interest rate deal. In contrast, if you have a variable rate mortgage and interest rates are set to rise, switching to a fixed rate deal could save you money.

Due to increased competition between mortgage lenders, the Early Repayment Fee, which was previously charged if you chose to repay your mortgage early, is not often applied to new commercial mortgages. If you find that this fee would apply to your mortgage contract, negotiating with your lender can often prove worthwhile: they will normally prefer to have your custom than lose it because of this charge.


Repaying a Commercial Mortgage

As with any form of finance where an annual interest payment is charged, the longer you take to repay your commercial mortgage, the larger its cost.

In most cases, the most common way to repay a commercial mortgage is through an 'equal payment' plan. This means that you pay a set number of equal repayments, whereby part of the payment covers the interest charge and the remainder goes towards repaying the amount borrowed. This is very similar to a standard repayment mortgage.

Another method of repayment is to opt for a 'final balloon payment' plan. This method also requires you to pay equal sums for a set period of time. When you have paid the last installment, you must then pay the remainder of the amount borrowed as a large lump sum. Because this lump sum is paid at the end of the mortgage term, the regular payments beforehand are much lower, which can help to free cash for use elsewhere in the business.

Alternatively, you can take out an 'interest-only payment plan'. These enable you to pay the interest charge each month and pay off the actual loan amount at the end of the mortgage term. Since you have not repaid any of the amount borrowed, the final 'balloon payment' is equal to the value of the entire loan amount.

Lastly, you can opt for a 'commercial endowment mortgage'. This is similar to a personal endowment mortgage, where a savings or investment plan is created alongside the mortgage, so that the entire loan amount can be paid off in one lump sum when the mortgage term is reached. You simply pay a small sum into the investment plan each month, plus the interest charges on the amount borrowed. These interest charges are usually smaller if you opt for a commercial endowment mortgage, because interest rates tend to be lower. There are several types of endowment scheme available, including: life insurance policy, personal equity policy or pensions plans.