What is a Commercial Mortgage?

A commercial mortgage is a type of mortgage arrangement which is used by businesses to either raise business finance or to purchase a commercial property / premises for the business.

All types of businesses can apply for commercial mortgages including Ltd companies, sole traders and partnerships.

With a commercial mortgage, the business loan is secured against commercial premises such as a shop, office, factory, pub, restaurant or warehouse. Although a commercial mortgage is secured against commercial property - many lenders will require a personal guarantee and / or a formal legal charge over your residential property in addition.

Where a personal guarantee has been provided by you, the commercial mortgage lender may try to repossess your residential property in the event that you default on the commercial mortgage payments even if a formal legal charge has not been registered against your residential property. Where a personal guarantee has not been provided the commercial mortgage lender can only usually recover the defaulted debt from the business itself and not recover any money from your personal assets.

But it is prudent to FULLY understand the extent of your liabilities in the event of your business being unable to repay a commercial mortgage, as most people prefer to keep their business proceedings separate to their personal financial arrangements as much as possible.

Commercial Mortgage Interest Rates and features overview

As a general guide, commercial mortgage rates are approximately 2% - 8% higher than residential mortgage rates, due to the greater element of risk this type of mortgage poses to the lender.

Some commercial mortgages allow you to have an initial period on interest only eg. 3 years on interest only. This helps reduce your payments during this initial period but remember that with an interest only mortgage your monthly payments are not actually paying off any capital borrowed at all.

It is possible to obtain commercial mortgages with either a fixed rate or a variable / tracker rate. Fixed rate commercial mortgages and some variable / tracker rate commercial mortgages will sometimes have Early Repayment Charge (ERC) penalties if you pay the mortgage off (in part or full) during an initial time period. eg. a 3 year fixed rate commercial mortgage may have ERC penalties applicable during the first 3 years (whilst the rate is fixed).

Some commercial mortgage products have flexible features such as allowing underpayments, overpayments, taking payment holidays etc... However, more features sometimes come at a cost with a higher interest rate and higher arrangement fees.

 

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