A UK commercial mortgage or business mortgage is a mortgage for buying property and land for business purposes that uses the commercial property as colleteral with the UK commercial mortgage lender retaining an interest in the property until the mortgage loan has been fully repaid.
UK commercial mortgage loans are available to limited companies, sole traders, partners and investors.
The UK commercial mortgages available are for customers looking to borrow between
£50,000 and £40,000,000 with terms available from 5 years up to 30 years and normally up to 80 percent loan to value (LTV) for UK commercial mortgages under £500,000.
There are three main types of commercial mortgages available; capital repayment, interest only or a combination of both.
There are also different types of UK commercial mortgage interest rates available to borrowers;
Commercial variable interest rate: the interest rate changes in line with the Bank of England base rate.
Commercial fixed rate: fixed for a set amount of time, usually between two and five years. At the start of the fixed commercial mortgage it will usually be higher than the commercial variable interest rate.
UK commercial mortgage rates start from a margin of 2.25 percent to 5.5 percent depending on loan to value (LTV) and status of applicant. The UK commercial mortgage rate you are offered will be based on both current rates and the amount of risk the commercial mortgage lender perceives they are to incur.
UK commercial mortgage repayment methods include repayment mortgages, interest only mortgages, endowment mortgages and pension plan mortgages.
For sole traders and partners you are personally liable for the repayment of the UK commercial mortgage.
Advantages of UK commercial mortgages;
* The commercial mortgage repayment will probably be similar to a rental repayment on the same property.
* Interest payments on commercial mortgages are tax deductible.
* If the property goes up in value your capital will increase.
* No rent increases.
Disadvantages of UK commercial mortgages;
* UK commercial mortgages require a deposit being put down.
* If you have a variable interest commercial mortgage the rates might go up as well as down.
* If the property goes down in value your capital will decrease.
What is a UK commercial mortgage?
In many aspects, a UK commercial mortgage is much like that of a residential mortgage. A borrower intent on buying or refinancing real estate pledges that property against a loan that is granted by a financial institution. Until the loan is paid off, the lender retains an interest in the real estate as lien holder. UK commercial mortgages can be considerably longer than more conventional types of lending; many stretching out to 30 years or more.
Also reminiscent of a residential mortgage is the terms of repayment that are agreed upon at the onset of a UK commercial mortgage. Payments made early on in the mortgage repayment period are comprised mainly of the interest that the bank is charging for the mortgage and very little actual principle. As time goes by and the bulk of the interest is paid, the interest and principle ratio begins to shift so that eventually more principle is being paid than interest. The good news about paying interest on a UK commercial mortgage is that it is typically tax deductible.
Though each financially lending institution has offers its own brand of commercial mortgage products, there are generally two types of mortgage repayment options. The first commercial mortgage repayment option uses a fixed interest rate. A fixed rate UK commercial mortgage is repaid at the same interest rate that was agreed upon by the lender and the borrower at the signing of the loan. The lender cannot raise or otherwise adjust the interest rate throughout the life of the loan. Conversely, a variable interest rate UK commercial mortgage has a fixed interest rate for a short period of time at the beginning of the repayment period. During this initial period of repayment, the payments usually quite low because the borrower is not repaying any principle at all; only interest. After the initial period is over, the interest rate is variable over the remainder of the loan life.
While variable interest rate UK commercial loans are quite common for a variety of reasons, they can also be volatile if the borrower is not intimately familiar with the terms of the loan and isn’t expecting the end of the initial, interest-only repayment period. Additionally, borrowers that have succeeded in repaying the mortgage in its entirety can be subject to what is known as an “early redemption charge” (ERC) clause in their mortgage note. An ERC is the bank’s method of ensuring that they are able to recoup at least a portion of the anticipated profit they would have made had the borrower not paid the UK commercial mortgage off early. Luckily for many commercial mortgage borrowers, increased competition in the UK commercial mortgage industry has caused many lenders to forego including an ERC clause in their loans to make them more attractive.