Repaying a commercial mortgage
Commercial mortgages carry higher interest rates than
residential loans because you are considered a higher
risk.
The term of the loan is at the discretion of the
lender. It will almost certainly be less than the
standard 25-year mortgage for domestic property, and can
be as short as ten years in some cases.
The interest rate you are offered will be based on
the lender's own assessment. Typically it will be
between 1 per cent and 6 per cent above the Bank of
England base rate.
There are two interest rate options - variable or
fixed.
Most commercial mortgage schemes have
variable rates. This means that the interest
rate varies in line with the Bank of England base rate -
but remember it will be a few percentage points higher.
Your repayments may rise or fall, and you should budget
accordingly.
A fixed rate means your repayments
are fixed for a certain period of time, usually two to
five years. At the time when the rate is fixed, it will
usually be higher than the variable rate.
Repayment methods
Different kinds of mortgages are repaid in different
ways. The lender or your broker will explain the various
options available to you. With a repayment
mortgage - sometimes called a capital and
interest mortgage - you repay a portion of the loan and
the accrued interest each month.
An interest-only mortgage means only
the interest is paid off with each monthly payment. To
be eligible, you must have an accompanying insurance or
pension policy, such as those featured below, that will
mature at a value close to the outstanding lump sum.
An endowment mortgage provides life
assurance cover and a fixed payment for investment. This
is a risky method of repayment, as it depends on the
performance of stock markets.
An Independent Savings Account (ISA) mortgage is an
interest-only mortgage - you make payments into an ISA,
and this tax-efficient investment is used to repay the
capital. However, ISA rules are subject to change.
Borrowers should seek advice from a suitably qualified
financial adviser.
A pension plan mortgage
entails payments made into a pension fund that repays
the mortgage on maturity. Again, you should seek
specialist advice if you are considering this option.
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