Commercial Investment Mortgages - for landlords of commercial/semi-commercial property. This is usually the best way to finance the purchase of land and/or buildings for your business and provides the most flexible and affordable financing solution. Mortgages may be structured several different ways. However, two of the most important aspects to consider are the interest rate (type) and the repayment schedule for the mortgage. There are two interest rate options: • Fixed Rate: the interest rate will remain constant through out a predetermined period. The interest rate is set at the beginning of your mortgage by examining the risk involved and the current market rates. • Variable Interest Rate: here the interest rate will fluctuate in line with changes to the Bank Base Rate or LIBOR and, as a result, so will the amount of your 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 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 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.

When determining your repayment schedule, you should be aware that the longer the payback period, the principal the higher your total interest payment will be.
• "Equal" Payments: 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.

• Interest-Only Payments and a Final Balloon Payment: here, 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.

Advantages

• Retain Ownership. You retain all the benefits of ownership in an asset that has the potential to appreciate in value. The lender is only entitled to an interest return on its mortgage, not a percentage of ownership that an investor would expect.
• Better Cash Flow. A mortgage gives you access to capital with minimal up-front payments and the flexibility to design a repayment schedule that suits your needs.
• Maximize Financial Leverage. Financing your property purchase with a mortgage will allow you to use your cash flow for other pressing needs.
• Simplified cash flow management. Mortgage schedules are preset, making cash management more predictable.
• Tax advantage. Interest payments on your mortgage are tax deductible and are made with pre-tax money. Purchases financed with profits, in contrast, are, made with after-tax money.

Disadvantages

• Collateral. The nature of a mortgage requires you to pledge the purchased property to the lender. If you default on the mortgage, the lender can foreclose on the property and sell it to repay the money owed to it.
• Defaults. The lender may define a variety of events that will constitute a default on the mortgage, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the mortgage documents.

Things to Consider

• Sale and leaseback. An alternative to mortgaging a property is to enter a sale and leaseback. In this, you would sell the property to a buyer, who would immediately lease the property back to you. The main advantage is that the buyer would be required to find the financing for the purchase. However you have sold your ownership of the property and you would not share in its appreciation.
• Legal and Professional Fees. Before you finalise your purchase and ownership of the property passes to you, you will incur several closing costs above and beyond the cost of the property and fees arranging for the mortgage. Common expenses to be paid at closing are title insurance, the site survey fee and various fees for preparing the legal documents.

Frequently Asked Questions (FAQs)
Why purchase property instead of letting?
Purchasing property is a large decision for any business. There are several advantages and disadvantages that should be considered before making your decision.
Advantages include:
• Fixing your overhead costs
• Potential asset appreciation
• Potential to sublet
• Mortgage payments may be cheaper then rent
Disadvantages include:
• Harder to relocate
• Drain on cash. You will not obtain 100% of the financing needed to acquire the property with a commercial mortgage and will need to use your current cash to finance a down payment and pay for any related expenses (alternatively, you may be able to raise additional cash against a residential property)
• Greater management responsibilities

What is the usual length of a mortgage?
For commercial mortgages the maximum length of the mortgage is usually 20 years for newer properties and 15 years for older properties.

How much cash do I need to provide for a down payment?
Typically lenders view a mortgage with a larger down payment as more secure. Most lenders typically like to receive 25% to 30% of the purchase price as a down payment. You will probably have to pay a higher interest rate for a loan with a smaller deposit.

How can I improve my chances of getting a mortgage?
The lender will base their decision on your ability to repay the mortgage so be prepared to demonstrate that you have a solid chance of repaying the loan. The lien on your property adds security but it will be help to show a history of your earnings and a projection of future earnings.

Note: unless the property is to be rented to a close family member, Buy-to-Let mortgages are not regulated by the Financial Services Authority and, therefore, any reference to the FSA, Financial Ombudsman Service and the Financial Services Compensation Scheme does not apply to these loans.

Written quotations are available on request. All loans are subject to status. A valuation or survey fee may be required. An administration fee may be payable.