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Understanding
a UK Commercial Mortgage
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 that 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 downtrend, 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 re-mortgage 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.
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Commercial Lifeline are UK
Commercial Mortgage and Bridging
Finance specialists.
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