Guide

Commercial mortgages and lenders

Repaying a commercial mortgage

Commercial mortgages may carry higher interest rates than residential loans because you are considered a higher risk - particularly if your deposit is lower than 25 per cent. The term of the loan will be at the discretion of the lender and is typically between ten and 20 years.

Interest rates

There are two interest rate options - variable or fixed. Rates are usually set between 1 and 6 per cent above the Bank of England base rate, but you should be prepared to shop around and negotiate for the best deal.

Most commercial mortgage schemes have variable rates and will fluctuate in line with the Bank of England base rate. 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, but it will allow you to plan your budget more reliably. At the end of the fixed rate period the rate may change to a market variable rate or you may have the right to renegotiate the loan.

Repayment methods

Different kinds of mortgages are repaid in different ways. 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 on the debt is paid off with each monthly payment. To be eligible, you may need to have an accompanying insurance or pension policy that will mature at a value close to the outstanding lump sum. You will certainly need to show that you will have the means to pay off the loan at the end of the term.

You should seek advice from a suitably qualified financial adviser before committing to a mortgage that relies on the proceeds of an investment or a pension to repay the loan. If you have an existing product, such as an endowment mortgage, you should also seek regular financial advice due to changes in the stock markets.

The Association of Professional Financial Advisers (APFA) provides further information and the option to search for a financial adviser.