How Business or Commercial Mortgages Function

A commercial mortgage is a specialised commercial loan where the borrower has to put a real property as collateral against the loan. The lender has a legal claim over the property under a commercial mortgage loan until the loan has been fully repaid.

Since this business mortgage is flexible and affordable, there has been a steady increase in the number of people applying for such types of commercial loan. The best part of such business and commercial finance options are that they can be structured according to the needs and requirements of your business.

However, there are two most important aspects of commercial mortgage loans - interest rates and the repayment schedule that need to be considered while applying for a loan.

Let us first focus on the two different interest rate options available in business and commercial mortgage loans:

Fixed Rate:

On a fixed rate commercial mortgage loan, the interest rate on the principal amount is negotiated and agreed at the time of approval of the loan by closely examining the risk involved and the current market rates. Here the interest amount is the same until the loan is amortized. With a fixed rate loan, you need to pay a fixed interest rate and no matter how much the market rate fluctuates, it will not affect the interest rate you pay.

Variable Interest Rate:

In variable rate commercial mortgages, the interest rate fluctuates during the payback period due to the changes that take place in the Bank Base Rate or LIBOR in the UK. As compared to fixed rate mortgages, here the interest rate is usually lower at the time of signing. The interest rate for each period is determined by the current market rate and a predetermined premium that remains constant throughout the life of the mortgage. The plus point of variable interest rate mortgage is that the borrower can save money when the market rate decreases but also risks paying more if interest rates increase.

Now let us analyse the various types of repayment schedules:

Commercial mortgage equal payments:

In this repayment schedule, you need to make equal payments during each period, be it on a monthly or quarterly basis for a particular time period. With each payment, you cover the interest and the rest reduces the principal.

Commercial mortgage equal payments plus final balloon payment:

Here, the borrower needs to make equal monthly payments of the principal and interest for a very short period of time. After paying the last installment, the remaining balance is required to be paid in one go which is known as a balloon payment. In case you are unable to make the balloon payment, you can refinance the mortgage to postpone the balloon.

Commercial mortgage interest-only payments plus final balloon payment:

In this repayment schedule, the borrower covers only the interest with regular payments, while the principal amount remains the same. At the end of the mortgage term, the balloon payment must be paid to cover the entire principal and any remaining interest.

Commercial endowment mortgage:

It is similar to an interest-only mortgage repayment schedule with the only difference of the repayment of the principal which comes from the proceeds of an endowment. Endowments can be in the form of life assurance policy, personal or executive pension plan policy, or a personal equity plan.

No matter which of the above mentioned interest rates and repayment schedules suit your business profile, always bear in mind that the longer you take to pay back the principal, the higher your interest payout will be.

It is advisable to take the help of specialists, who can help you to design the appropriate business strategy and a detailed plan of your business finances. There are various business finance companies that can help you to study and compare various lending institutions to help you do thorough homework before you finalise the lender from where you can apply for a commercial mortgage loan.