Commercial Mortgages - a Borrower's Guide

A commercial mortgage is a loan extended to businesses where real estate assets are used as collateral to secure the repayment. This kind of loan is more or less similar to a residential mortgage but there is one major difference - in commercial mortgages only commercial buildings or other business real estate can be used as the collateral, where as in residential mortgages the residential property is taken by the lender as collateral.

Moreover, only businesses can get commercial mortgages quotes, be it a partnership firm, an incorporated business or a limited company. Hence, the paperwork and the assessment of the creditworthiness of the borrower are quite complex and extensive as compared to with residential mortgages where an individual applies for the loan against his/her property.

Important aspects of commercial mortgages Loans

As is the case with any kind of loan, the two most important aspects of a commercial mortgage are the interest rate and the repayment schedule. Both can be structured according to the needs of the borrower and the assessment of the borrower by the lender.

Interest rates

Generally there are two interest rate options given to the borrower.

* Fixed Rate : In this case the interest rate payable on the outstanding principal remains the same through out a predetermined period. The rate is arrived at by examining the risk involved and the current market rates. The higher the risk as seen by the lender, the higher the interest rate payable. The main advantages are freedom from fluctuating payments and the resulting ease in budgeting. On the downside, a fixed rate regime does not let the business benefit from any fall in the prevailing interest rates. * Variable Interest Rate: In this case the applicable interest rate varies with the prevailing interest rate. This means that with every fluctuation in prevailing interest rates the amount of repayment will be affected. The applicable interest rate will be the current market rate plus a premium determined on the basis of market conditions, type of borrower's business and the credit worthiness of the borrower.

Usually the applicable rate of interest is lower with variable interest rates. However, in the case of any increase in interest rate the amount of repayment increases as well.

Repayment schedule

Repayment schedules are fixed keeping in view the repaying capacity of the borrower, the risk factors and the type of business of the borrower among other things. Though longer period loans have lower periodic payments, the amount ultimately paid will be higher than the shorter schedules.

Usually the following types of repayment schedules are offered to borrowers.

* Equal Payments: This is the most common of all schedules. In this type of mortgage borrowers are required to pay the equal amount each period for a predetermined number of periods. This period can be monthly, quarterly etc. depending on the agreement between lender and the borrower. * Equal Payment and a Final Balloon Payment: In this case there are equal monthly payments for a relatively short period of time followed by one big payment called the balloon payment consisting of the balance amount remaining. * Interest-Only Payments and a Final Balloon Payment: Here regular payments cover only interest. At the end of the mortgage period a balloon payment is made covering the entire principal and any remaining interest. * Endowment Mortgage: This is like an interest-only mortgage but the principal is repaid from the proceeds of an endowment such as life assurance policy, personal or executive pension plan policy, or a personal equity plan.