In many ways a commercial mortgage is just like a residential mortgage in that you pledge real property as collateral against a loan to either buy or refinance that property. You can also receive a commercial re-mortgage and use it as a line of credit for any business purpose. When you use a commercial mortgage to buy property, or to raise funds for any other business purpose,
lender retains an interest in that property until
loan has been paid in full. Unlike other types of business loans, which usually have a relatively short repayment period, you can take out a loan for as long as 30 years if you like.The lender receives repayment of
commercial mortgage principal and interest over
lifetime of
loan. If you default on
loan and go into arrears then
lender can foreclose and take possession of
property which was used as collateral.
Generally speaking,
interest on a commercial mortgage is tax deductible and
net proceeds of
loan are not considered to be taxable income. However, you should always check with your accountant to be sure because
tax consequences can be severe should it be determined that your usage of
funds was not for a qualified business purpose.
Should you be seeking a commercial mortgage for
purposes of operating your business, rather than actually buying property, then
lender will either want to re-finance your current mortgage, and include enough money to provide
amount that you are seeking, or they may arrange an equity line where they lend you
difference between
current value of your commercial property and
amount that you owe on
current mortgage.
There are generally two types of interest schemes available when you are applying for a commercial mortgage.
The fixed rate commercial mortgage establishes an interest rate that is in place either for
life of
loan or for a fixed period of time. If it is for a fixed period of time then it will normally convert over to
second type of rate, which is called a variable interest rate, after
fixed time period expires.
In some cases your lender may add a Early Redemption Charge (ERC) clause to your commercial mortgage contract which states that if you pay off
note prior to
end of
fixed rate period then
lender is entitled to a one-time lump fee to offset their loss of expected income. In some cases this ERC may extend to longer periods possibly up to
entire term of
loan. Be very sure to read your loan contract carefully to make sure that you understand
implications of
ERC if it is present.