Understanding a Commercial
Mortgage
by:
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 which 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 down trend, 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 remortgage 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.
______________________
About The
Author
Commercial
Lifeline http://www.Commercial-Lifeline.co.uk are Commercial Mortgage
and Bridging Finance specialists.
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