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 which 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 down trend, 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 remortgage 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. 

http://www.Commercial-Lifeline.co.uk are Commercial Mortgage 
and Bridging Finance specialists.

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