When you are applying for your commercial mortgage, you will find yourself faced with a large number of choices as to the type of mortgage you get and the different ways of repayment.
The main ways in which commercial mortgages vary are in the interest rate options and the types of repayment schedule.
As far as interest rates are concerned, the two main options are fixed rate and variable rate.
Fixed rate commercial mortgages. With this mortgage type you are offered a specified interest rate for a specified period – say five years. After this the mortgage reverts to the current mortgage variable rate. It can be advantageous to go for one of these if you expect interest rates to rise, or if it is essential for your business to keep your outgoings stable. You may decide to refinance after the expiry of the fixed rate period and perhaps go for another fixed rate mortgage. However, there is one thing you need to beware of. Some lenders impose an Early Redemption charge which often lasts well beyond the fixed rate period. Ask your broker to find you a lender who does not do this.
Variable rate commercial mortgages. The interest rate you pay will rise and fall with the bank base rate, though not necessarily by the same amount. Mortgages of this type are often offered with an initial reduced rate, which can be deceptive as it then reverts to a rate that is not nearly so competitive. Make absolutely sure that you know what the “normal” rate will be after the introductory period.
The other way in which commercial mortgages can vary is in the types of repayment schedule. There are a number of different repayment plans you may be able to choose from.
Capital repayment commercial mortgages. This is the most common type of repayment plan. You make a payment every month which consists partly of interest and partly of the capital. You can usually set the length of the mortgage term so that the shorter the term, the more of the capital gets paid off each month. The length of the term is ultimately at the lender’s discretion, but loan terms tend to be shorter than the 25 years that is common for residential mortgages. If you are on a variable interest rate, the amount of your payments will of course go up and down with the interest rate.
Equal payment mortgage with final “balloon” payment. Many commercial mortgage lenders will offer you the option of making lower equal payments for a shorter period of time, and then paying off the balance in one big payment. This can benefit you, especially if you are a new start-up, by allowing you to budget for lower payments in the early period. If you find you have difficulty making the final payment, you may be able to refinance the mortgage.
Interest-only commercial mortgages. This way your monthly payments only cover the interest. The principal stays the same. Again, you can benefit by having lower monthly payments, but you have to make other arrangements to pay off the capital. You may need to pay into an endowment or insurance policy, or sell off some assets to repay. Or again, you could refinance the loan.
It is really beneficial to consult a broker when considering a commercial mortgage. There are so many lenders and so many different types of arrangement, that you could find it very confusing. However, this variety makes the chances of finding something to suit your particular requirements very high.
Please note that the FSA do not regulate commercial loans or commercial mortgages