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Commercial Mortgages and How They Work

By: Garry Crystal - Updated: 12 Oct 2012 | comments*Discuss
Commercial Mortgages Commercial

Taking good business advice on commercial mortgages and how they work will be beneficial for anyone who is considering buying business premises. As with any type of mortgage there will be certain lenders’ criteria that must be satisfied before the mortgage loan will be supplied.

What Is A Commercial Mortgage?

Commercial mortgages are intended for borrowers who wish to buy business premises. A start-up business may be looking for premises or offices, or a more established company may be looking to expand their business by buying other premises. Mortgages will have a set repayment period and lenders will usually supply between 40% and 70% of the total cost.

In almost all cases a lender will expect the borrower to invest some of their own money into the purchase before guaranteeing the mortgage. The more money you invest the greater the chance of gaining the mortgage from a lender.

Terms And Conditions

As with any mortgage there will be terms and conditions applied and interest rates should be uppermost on any borrower’s mind. Mortgages for business premises can have very low interest rates, and it will be beneficial to shop around.

Interest rates will be either fixed or variable and you will need to decide on the pros and cons of each one before choosing. The variable interest options will usually give you a lower initial interest rate but you are not protected from a rise in the market rates. Fixed rates are set but you will not be able to take advantage of any decrease in the market rate.

Advantages Of Buying Business Premises

Owning your business property can be a good investment and it is another business asset to add to your list. Advantages to owning your premises will include:
  • Tax is deductible on interest payments
  • Property prices can rise meaning you will increase your amount of capital
  • Repayments will usually be around the same cost as they would be if your were renting the property
  • No rent to pay and you are not subject to rent increases
  • Unused business space can be sublet bringing more money into the business
  • Mortgage payments are set and easy to fit into cash-flow forecasts

Commercial Mortgage Repayments

If you are successful in your application then you will also have to decide on the repayment methods. Repayment methods will include equal payments, where you pay a fixed sum each month with an equal percentage paying back interest and the principle loan. You can pay equal amounts to interest and principle, and then make a final payment, which will keep repayments low. You can also make interest only payments and then pay the principle back at the end of the loan period. You can take out an endowment policy which will cover the principle made from your endowment payments, and you will pay the interest every month.

Disadvantages To Buying Premises

There are of course a few disadvantages to buying premises instead of leasing and these are mainly with regards to the lender. Commercial mortgages will usually require deposits from the borrower and there will also be arrangement fees. Look out for terms on late payments and default arrangements; if you fail to keep up with payments the lender can repossess the property. You will also be liable to all repairs and maintenance on a property that you own. The value of the property can decrease as well as increase leaving you with a loss when it comes time to resell.

Choosing A Lender

Choosing the right lender will take some research on the borrower's part. Your own bank may be willing to provide the mortgage but this does not necessarily mean the best deal for you. The lending market is highly competitive and there are a number of options available including online only lenders. Shop around for the lowest interest rates that you can find and the best terms and conditions offered. Consult business advisors and business enterprise agencies for advice and information on the best type of mortgage options tailored to your particular requirements.

There are a lot of positives to be found by investing in your own business premises. However, you will be tied into a contract for a substantial number of years and it is a big commitment. Buying business premises should be considered very carefully and should be compared against other options such as renting and leasing. Always take the best advice from an independent advisor, and thoroughly read all contracts before signing.

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