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This
a short sample article relating to Bridging Finance.
You can download the full guide to Bridging Finance, Commercial Mortgages
or Buy to Let Mortgages by visiting our Commercial
Mortgage Guide page.
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Understanding
a Commercial Mortgage
© Copyright 2005 Commercial
Lifeline
In many ways a commercial mortgage is just like a residential
mortgage in that you pledge real property as collateral against
a loan to either buy or refinance that property. You can
also receive a commercial re-mortgage and use it as a line
of credit for any business purpose.
When you use a commercial
mortgage to buy property, or to raise funds for any other
business purpose, the lender retains an interest in that
property until the loan has been paid in full. Unlike other
types of business loans, which usually have a relatively
short repayment period, you can take out a loan for as long
as 30 years if you like.
The lender receives
repayment of the commercial mortgage principal and interest
over the lifetime of the loan. If you default on the loan
and go into arrears then the lender can foreclose and take
possession of the property that was used as collateral.
Generally
speaking, the interest on a commercial mortgage is tax deductible
and the net proceeds of the loan are not considered to be
taxable income. However, you should always check with your
accountant to be sure because the tax consequences can be
severe should it be determined that your usage of the funds
was not for a qualified business purpose.
Should
you be seeking a commercial mortgage for the purposes of
operating your business, rather than actually buying property,
then the lender will either want to re-finance your current
mortgage, and include enough money to provide the amount
that you are seeking, or they may arrange an equity line
where they lend you the difference between the current value
of your commercial property and the amount that you owe on
the current mortgage.
There are generally two types of interest
schemes available when you are applying for a commercial
mortgage.
The fixed
rate commercial mortgage establishes an interest rate that
is in place either for the life of the loan or for a fixed
period of time. If it is for a fixed period of time then
it will normally convert over to the second type of rate,
which is called a variable interest rate, after the fixed
time period expires.
In some cases your lender may add a
Early Redemption Charge (ERC) clause to your commercial mortgage
contract which states that if you pay off the note prior
to the end of the fixed rate period then the lender is entitled
to a one-time lump fee to offset their loss of expected income.
In some cases this ERC may extend to longer periods possibly
up to the entire term of the loan. Be very sure to read your
loan contract carefully to make sure that you understand
the implications of the ERC if it is present.
With competition
from lenders heating up you'll find that many of them are
dropping ERC clauses all together. If there is one present
in your loan contract you may be able to negotiate it away
with little effort. It's worth trying in any case and you
can always apply somewhere else if your lender is not willing
to negotiate.
In the case of a variable interest
rate commercial mortgage the rate is based upon those issued
by Bank of England. The lender will usually state that the
rate consists of the published rate, which will likely vary
up and down over the life of the loan, plus some pre-determined
premium that remains the same for the life of the loan. Be
sure that you understand how frequently your rate will change
and that you are comfortable with the amount that the lender
is charging as a premium. As with any terms of your loan
you can negotiate both of these factors.
A fixed rate commercial
mortgage is a good choice when you feel that interest rates
are headed up sharply and you want to lock in the current
rates. On the other hand, if interest rates are in flux,
and economic indicators point to a downtrend, then a variable
rate may be your best choice.
Keep this strategy in mind
during the lifetime of your commercial mortgage. If you are
locked into a fixed rate, and interest rates have dropped
significantly below what you are paying, you should consider
applying for a re-mortgage and selecting a variable interest
rate to take advantage of the lower rates. On the other hand,
if you are in a variable, and all indicators are that interest
rates will be skyrocketing soon, then look to move into a
fixed rate so you can protect yourself against future increases.
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Commercial Lifeline are Commercial Mortgage and Bridging
Finance specialists.
You can download our free guides to Commercial
Mortgages, Bridging Finance
or Buy to Let Mortgages by visiting our Commercial
Mortgage Guide page.
This article comes with reprint rights. Feel free to reprint and distribute as
you like.
All that we ask is that you do not make any changes, that this resource text
is
include, and that the links above are intact.
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