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Commercial Mortgages Information Guide

Commercial Mortgages Information Guide Contents

How Commercial Mortgages Work

Commercial mortgages may be structured in several different ways but the two most important aspects of commercial mortgages to consider are the interest rate (type) and the repayment schedule for the mortgage.

Commercial Mortgage Interest Rate Options

There are two interest rate options for you to consider:

  1. Fixed Rate Commercial Mortgage: With a fixed rate the interest rate (i.e. the percentage) applied to the outstanding principal remains constant through out a predetermined period that may or may not be equal the length of your mortgage. The interest rate is set at the beginning of your commercial mortgage by examining the risk involved and the current market rates. The advantage of a fixed rate commercial mortgage is that your interest rate is fixed and will not rise if the market rate rises. The disadvantage is that you will not benefit from any reduction of the market internest rate.
  2. Variable Interest Rate Commercial Mortgage: With a variable interest rate the interest rate applied on the outstanding principal fluctuates in line with changes to the Bank Base Rate or LIBOR and, as a result, so will the amount of your commercial mortgage payments. The interest rate for each period will be the current market rate plus a predetermined premium that remains constant throughout the life of your commercial mortgage. Generally, you can initially get a lower interest rate on variable interest rate than on a fixed rate mortgage. The advantage of an adjustable interest rate mortgage is that you save money when the market interest rate decreases. The disadvantage is that you are not protected from an increase in the market rate and the interest rate you pay will increase with the market rate.

Commercial Mortgage Repayment Schedules

When deciding on your repayment schedule you should always remember the longer you take to payback the principal the higher your total interest payment will be.

Below we summarise the various commercial mortgage repayment schedules:

  • "Equal" Payments Commercial Mortgage: Probably the most common schedule, this type of mortgage requires you to pay the same amount each period (monthly or quarterly) for a specified number of periods. Part of each payment covers the interest and the rest reduces the principal.
  • "Equal" Payment and a Final Balloon Payment: This type of mortgage requires you to make equal monthly payments of principal and interest for a relatively short period of time. After you make the last instalment payment, you must pay the balance in one payment, called a balloon payment. Some lenders will give you the option to refinance the mortgage to help you stretch out the final balloon payment. This type of mortgage offers definite benefits to you. Because of the lower monthly payments during the course of the mortgage, you can keep more cash available for other needs. Of course, when you are thinking about those nice low payments, don't forget the big balloon payment waiting around the corner.
  • Interest-Only Payments and a Final Balloon Payment: With this type of mortgage, your regular payments cover only interest. The principal stays the same. At the end of the mortgage term, you must make a balloon payment to cover the entire principal and any remaining interest. The obvious advantage of this arrangement is the low periodic payments. But over the long term, you will pay more interest because you are not reducing the principal sum on which you pay interest
  • Endowment Mortgage: This type of mortgage is similar to an interest-only mortgage but the repayment of the principal comes from the proceeds of an endowment. Several types of endowments are eligible for this type of mortgage, they include: life assurance policy, personal or executive pension plan policy, or a personal equity plan. The additional security provided by the endowment usually result in a lower interest rate.

Commercial Mortgages Information Guide Contents

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