Finance Hero

A commercial mortgage is a mortgage loan, quite similar to that of a residential mortgage. But here, the loans are secured on commercial property like shops, factories, warehouses, business premises, hospitals, garages and schools. Lenders usually require a deposit of around 25% – 40% of the total value. They will also assess your business before quoting you an interest rate.

How different is a commercial real estate loan from a residential mortgage loan?

Commercial real estate loans are designed differently from residential mortgage loans. Generally, commercial real estate loans have a shorter term, say, ten years. As the payments are made on a monthly basis over the loan term, the loan is not paid in full at the end of the loan term. On the contrary, a certain percentage of the loan is due and payable as a lump sum or balloon payment.

However, a lender must be careful while issuing and recording a commercial mortgage, in order to avoid any problem. If the mortgage is not formatted properly, the lender might lose its avenue to the collateral.

Few problems with commercial real estate mortgages:

• Need of cash

A mortgage is not going to provide the entire financing required to acquire the property. You have to use your current cash to make a down payment and pay for any other related expense.

• Harder to change location

When you own a property and decide to relocate it, it is essential for you to determine whether you should sell the land or search for a new tenant. Also, selling business premises is often a complex and lengthy process.

• Management responsibilities increase

If you let the property, the landlord is entitled to look after the maintenance and security of the property. In such a case, you will be responsible for things like insurance, fixtures, decoration, which may prove to be very expensive.

• Increase in interest rates

If you possess a variable rate mortgage, you are likely to get exposed to increased rates of interest.

• Strict formatting rules

When it comes to mortgage formatting, some states can be very strict. There are certain formatting rules like the document has to start three inches from the top of the page. If the formatting rules are not followed properly, the recorder might return the document unrecorded. If the funds are already disbursed by the lender, the loan remains unsecured until the documents are correctly formatted.