A commercial mortgage is probably the best way to finance the purchase of buildings and land for business purposes, it provides the most flexible and affordable finance solution. Commercial mortgages are specialised due to the fact that the lender has a legal claim over the property until the loan has been repaid in full.

Remember when arranging a mortgage; always consider its effects on your cash flow and assets. This section will give you a general overview about Commercial Mortgages but it doesn't replace professional advice in any way. You should always consult your accounting and financial advisors before finalising a loan to get the maximum benefits and avoid any complications.

Mortgages are structured several different ways but the two important aspects to consider are the interest rate and the repayment schedule for the mortgage.

The two interest rate options are;

Commercial Fixed Rate:

Features a set interest rate for a fixed period of time. Once this period has ended the normal variable rate is paid. Arrangement fees are normal when taking this type of mortgages.

With a commercial fixed rate you may incur an (ERC) early redemption charge, this may extend beyond the fixed rate term. For example the fixed rate may only apply for 3 years but the penalty period may be an extra 5 years during which you must pay the variable rate of the lender.

This practice is widely frowned upon and many providers now offer fixed rate mortgages with no penalty for extra payments or amendments to the agreement once the fixed rate period has ended.

People tend to choose a fixed rate mortgage when they expect interest rates to rise or need to stabilise their monthly payment amount.

Commercial Variable Interest Rate:

The variable interest rate is an interest rate that mirrors and changes to the Bank of England's Base Rate. The current market rate and a set premium that remains uncharged throughout the mortgage constitute the interest rate for each period. Remember that you can initially get a lower interest rate on variable interest rate than on a fixed rate mortgage.

The advantage of a variable interest rate mortgage is that you save money when the market rate decreases. The flip side to this is that you are not covered from an increase in the market rate. This simply means the interest rate you pay will increase with the market rate.

Advantages:

Retain Ownership:

Instead of raising funds by selling a share in the property or the business to an investor, you retain complete ownership. The lender is only entitled to an interest return on its mortgage, not a percentage of ownership that an investor would expect. Also they can only exercise the right if you default on payment. You retain all the benefits of ownership in an asset that has the potential to increase in value.

Tax advantage

Interest payments on your mortgage are tax deductible and are made with pre-tax money.

Better Cash Flow

A mortgage gives you access to capital that you would not normally have access to with minimal up-front payments and the flexibility to design a repayment plan that suits your needs.

Simplified cash flow management

Mortgage schedules are pre-set, making cash management more predictable.

Disadvantages:

Collateral

The nature of a mortgage requires you to pledge the purchased property to the lender. If you default on the mortgage, the lender is able to foreclose the property and sell it to repay the outstanding money owed to the lender. Make sure when the mortgage is repaid; the lender is obligated to release the mortgage and is required to make available any government files acknowledging this release.

Defaults

The lender may define a variety of events that will constitute a default on the mortgage, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the mortgage agreement. Try to negotiate an advanced written notice of any alleged default, with a reasonable amount of time to cure the default.

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