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Commercial Mortgages
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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