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
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
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
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
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.
Commercial Lifeline are Commercial Mortgage
and Bridging Finance specialists.
You can download our free Commercial Mortgage guides by
Commercial Mortgage Guide page.
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