Commercial mortgages are loans for the purchase of a property which is to be used for business purposes. They could be used to buy anything from a warehouse or a factory to a shop or an office. However it could also apply to the purchase of land, which will then be used to build business premises.
This type of mortgage is very different to the residential variety because, whilst the loan is being repaid, the lender has all legal rights to the property. However, this claim is only exercised if the borrower defaults on payments – the borrower is still the owner of the asset. Interest charged on the repayments of commercial mortgages is tax deductible.
Commercial mortgages can either come in the form of a fixed-rate loan or a variable interest rate. As with residential mortgages, the fixed-rate deals usually charge a higher rate, initially, than the variable rates. However, there is always the risk the variable rates will go up. Fixed-rates allow businesses to budget more accurately and are more reliable.
Who are Commercial Mortgages for?
Commercial mortgages are designed and created for companies, new or existing, who need to buy premises or land to create space for their operations. This includes the purchase new buildings as well as taking over an existing business and its premises.
Pitfalls of Commercial Mortgages
Lenders are more than aware of the potential commercial gains of buying a business premises and, for this reason, interest rates on these mortgages are usually much higher. However, business owners can usually reclaim some of this extra expenditure in tax deductions.
The legal claim which the lender has over the property can make some people reluctant to take out this kind of mortgage. It means that if the borrower defaults on their mortgage repayment the lender can sell the property to reclaim the money owed to them.
Check the small print of your agreement because lenders will often consider a default to include bankruptcy, insolvency and breaches of the mortgage contract as well as failure to make a payment.
It is also important for borrowers to check the lender will release the mortgage when it is fully repaid. The government holds files to record this, and these can be checked.
Also, as with residential mortgages, lenders can request early repayment charges to be made. Watch out for this – many lenders have stopped making these charges now, so don't be forced to go with a lender which makes this demand.
Where to buy Commercial mortgages
Shopping around is essential, especially when you consider that lenders slap very high fees and charges onto commercial mortgages.
Most of the high street banks and building societies provide commercial mortgages as part of their services to businesses. But there are also a number of specialist firms in the market who concentrate purely on providing commercial loans. A number of price comparison websites include quotes for commercial deals. However, a mortgage broker can also provide personal advice which will take into account all areas of your business as well as scouring the market for the best deals.