The Subtleties behind Commercial Mortgages

Purchase of a commercial property is a great option for own use or for leasing as an additional income source. Especially for own use, it has several advantages as compared to rented commercial property. If you are leasing it to others, you stand to take advantage of growing economy due to higher interest rates. However, before making the plunge to get a commercial mortgage and buy a property, there are certain subtleties that you must take some time to understand.

Fixed or floating interest rate

You must carefully decide whether you want to go for a fixed interest rate or a floating interest rate. The interest rate of the lenders varies according to market conditions and Federal Reserve banking policies. If you have chosen a variable or floating interest rate, your interest for outstanding amount will be varied according to these factors. You may be charged a higher or a lower interest. However, you have the option to lock down this interest at the point where it is at the time of borrowing. If the rate is at a historic low point, you may be charged a fee to lock it down. Consider the cost of these options carefully.

Own use or leasing to others

The eagerness of lenders to offer you credit will depend on whether you want to use it for your own business or you wish to lease it. If you are using it yourself, that pretty much guarantees occupancy. But if you are leasing it to others, then you may or may not have difficulty finding tenants. Without rent-paying tenants, you may default on your mortgage. This is considered as an additional risk and hence you may be charged higher interest or offered less favourable terms.

Type of property and location

The type of the property is also taken into account while offering a loan. If the business owner intends to start a restaurant or retail business, it is considered a higher risk. If the business defaults, such type of property is also harder to quickly sell. On the contrary, an office space or a warehouse is easier to sell since a number of different businesses use such property. Hence, a lower interest rate may be offered. The same is true for the location of the property. A commercial space in a busy commercial area in a major city is likely to be in demand as compared to a rural property. Hence, commercial property in high demand areas may be offered lower interest.