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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 specialized due to the fact that the lender has
a legal claim over the property until the loan
has been repaid in full.
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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.
How Commercial Mortgages Work
Mortgages are structured several different ways but the two important
aspects to consider are the interest rate and the repayment schedule
for the mortgage.
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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.
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Advantages and Disadvantages
of Commercial Mortgages
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 axes 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 at preset, 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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Read
the Small Print
Mortgage fees
The lender can charge up-front loan or processing fees. Check
these fees very carefully, and get an estimate as soon as possible
to help you evaluate the mortgage package.
Prepayment
Ideally you want to be free to pay off the mortgage at any
time before it's final date. The majority of lenders are likely
to charge a redemption penalty in the first 3 to 5 years of
the mortgage. But after that initial period, you should make
sure that your mortgage agreement gives you the right to avoid
a prepayment penalty for paying off the mortgage or part of
the mortgage early.
Grace period
Get a grace period for any payments. Say for example, the monthly
payment is due on the first day of each month, but it won't
be deemed late until the fifth day of the month.
Legal and Professional Fees:
Before you finalize your purchase and ownership of the property
passes to you, you will incur a number of costs. Common expenses
to be paid are title insurance, survey fee and various fees
for preparing any legal documents.
For more information about Commercial Mortgages
check out our Frequently Asked Questions
section.
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