How Commercial Mortgages Work
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How Commercial Mortgages Work
Mortgages are structured several different ways but the two important aspects to consider are the interest rate and the repayment schedule for the mortgage.
The two interest rate options are;
Commercial Fixed Rate
Features a set interest rate for a fixed period of time. Once this period has ended the normal variable rate is paid. Arrangement fees are normal when taking this type of mortgages.
With a commercial fixed rate you may incur an (ERC) early redemption charge, this may extend beyond the fixed rate term. For example the fixed rate may only apply for 3 years but the penalty period may be an extra 5 years during which you must pay the variable rate of the lender.
This practice is widely frowned upon and many providers now offer fixed rate mortgages with no penalty for extra payments or amendments to the agreement once the fixed rate period has ended.
People tend to choose a fixed rate mortgage when they expect interest rates to rise or need to stabilise their monthly payment amount.
Commercial Variable Interest Rate
The variable interest rate is an interest rate that mirrors and changes to the Bank of England's Base Rate. The current market rate and a set premium that remains uncharged throughout the mortgage constitute the interest rate for each period. Remember that you can initially get a lower interest rate on variable interest rate than on a fixed rate mortgage.
The advantage of a variable interest rate mortgage is that you save money when the market rate decreases. The flip side to this is that you are not covered from an increase in the market rate. This simply means the interest rate you pay will increase with the market rate.
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