A commercial mortgage can be defined as a loan that is secured on property that is not your residence. This type of loan is useful if you are interested in purchasing or updating a commercial property. A commercial mortgage is similar to a traditional mortgage loan, but instead of a residential property, you obtain land or a property for commercial use. Office buildings, shopping centers, warehouses, etc., come under this category.
Key Features:
- Commercial mortgages do not usually have fixed rates. Therefore, every application that is submitted is carefully reviewed to check for risk levels.
- Commercial mortgages have a higher interest rate than residential mortgages.
- Since these mortgages need property as collateral, they usually offer better interest rates than normal business loans.
Who needs a commercial mortgage?
Most businesses need an office or store to interact with customers or a warehouse to store inventory. Moreover, owning a commercial property gives future equity to a business as real estate prices appreciate. For reasons like these, most businesses look for options like a commercial mortgage.
Who are the lenders?
A commercial mortgage can be secured from various sources. Given below are some of the major lenders:
- Banks
- Government-sponsored enterprises
- Life insurance companies
- Asset-backed trusts
Requirements and application procedure
Since commercial mortgages differ, their criteria and requirements differ too. Factors like years in business, credit score, and terms, might vary from lender to lender. Some financial documentation that will be needed is business and personal tax returns, financial records for the business, asset and liability statements, bank statements, financial history, director, and business partner profiles.
As is done in a traditional loan, a lender will first gauge pre-qualifying potential. This process will involve the evaluation of income, financial history, and debts. The application process follows this initial check. Lenders will generally ask for tax returns and bank statements from the last 3-5 years to check for business stability. It is also advisable to be prepared to show a lender your business plan with projected earnings. Lenders also evaluate credit history, income, and collateral. After approval of the paperwork, the loan application is evaluated by the underwriter who will then approve or reject the application based on information.
Commercial mortgages usually take a few months to process owing to the large sums of money involved and property appraisals.
Pros and Cons
Every decision you take regarding your business has to be thought out carefully. The same is the case while considering a commercial mortgage. Here are a few pros and cons to consider.
Pros
- The interest payment is tax-deductible.
- Capital increases with an increase in building value.
- You can change, decorate, or add as per your wish.
- On lender approval, you might be able to sub-let free space.
- There is no issue of a rent increase.
Cons
- A commercial mortgage usually means a hefty deposit as you are essentially buying a building.
- Relocating in the near future gets difficult due to the rental agreement.
- You are in charge of the maintenance of the building.
- If you have a variable commercial mortgage, you might face an increased rate of interest.
- Your capital will decrease if the building loses value.
A commercial mortgage is complex, takes time, and involves expenditures. Therefore, you should consider all factors carefully before you decide on applying.
