A commercial mortgage is most likely the best way to finance the purchase of land and/or buildings for your business, as it probably provides the most flexible and affordable financing solution. A commercial mortgage is a specialised commercial loan in which the lender has a legal claim over the property until the loan has fully been repaid. When arranging a mortgage, consider its effects on your cash flow and assets. You may wish to consult your accounting and tax advisors before finalising a loan to reap the maximum benefit and avoid complications.

Commercial mortgages may be structured several different ways but the two most important aspects to consider are the interest rate (type) and the repayment schedule for the mortgage.

There are two interest rate options for you to consider:

Fixed Interest Rate: With a fixed rate the interest rate (i.e. the percentage) applied to the outstanding principal remains constant through out a predetermined period that may or may not equal the length of your mortgage. The interest rate is set at the beginning of your mortgage by examining the risk involved and the current market rates. The advantage of a fixed rate loan is that your interest rate is fixed and will not rise if the market rate rises. The disadvantage is that you will not benefit from any reduction of the market rate.

Variable Interest Rate: With a variable interest rate the interest rate applied on the outstanding principal fluctuates from in line with changes to the Bank of England 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 usually 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.