Commercial mortgage fees and repayments

Again it is useful to draw a parallel here between the commercial mortgage arena and the standard mortgages we are all familiar with from our own homes.

However, generally there will be a higher rate of interest to pay on a commercial mortgage when contrasted with a personal one. To some this may seem counter-intuitive as we tend to think that businesses get better rates for things than individuals due to their size, but infact it makes sense because generally the higher risk a product the more the bank will need to justify that risk.

If you think about loans for those with poor credit ratings, for instance, the interest rate is higher as there is more risk of them defaulting. Similarly with a commercial mortgage the amount of the mortgage will be much higher than an ordinary residential one, therefore meaning it is higher risk to the lender (in most circumstances) and therefore the rates will tend to be higher.

Of course, the greater the deposit then the better the repayment rate you may be able to get as by increasing the size of the deposit you are reducing the financial exposure / risk to the lender on the mortgage product.

There are two main types of commercial mortgage, and these are fixed and variable rate products. The major pro and con of these is the familiar one: with a variable rate product you get lower payments if rates fall, but conversely higher if rates go up, whilst with fixed rate you don't benefit or suffer either way and know exactly what payments are for the fixed rate term.

As with residential mortgages, there will be a range of fees for setting up the mortgage in the first place, and these are not insignificant. Fees could include all the legal fees, the valuation fee that the lender incurs when having a survey done on the property, and then there are often arrangement fees to pay too. Also check to see if there are penalties in place if you overpay on the mortgage or pay off the balance in advance, as redemption penalties do exist so you should check if they are in place for the commercial mortgage you are considering.

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