Although many commercial business owners lease their business premises from landlords, there are some who prefer to own the space or building from which they run their enterprise. There are some obvious advantages to owning your own building for a retail or industrial application. These advantages include the ability to keep your business in one place for a long time and not have to be subject to large rent increases when the lease runs out. Other advantages include the simple fact that real estate is a good investment and provides you with the ability to lease out a portion of the building you buy and derive additional rental income from tenants.
Are Commercial Mortgages Different from Residential Mortgages?
Regardless of what you plan to do with your business the principal of a commercial mortgage is not all that dissimilar from the mortgage you use to buy your home. Basically, you are using the property and building as collateral to be used against the mortgage or money you are borrowing to buy that property.
The mortgage lender has a stake or interest in the property until the mortgage or loan is paid in full. It all depends on the length of the mortgage. And, just like a home mortgage, if you default on the commercial mortgage, the lender can take possession of the commercial property through a foreclosure.
Tax Advantages of a Commercial Mortgage
There are some tax advantages with a commercial mortgage which don’t apply to residential mortgages because the interest on a commercial mortgage my be tax deductible. However, this should always be verified with your tax accountant.
Two basic Types of Commercial Mortgages
There are two basic types of commercial mortgages that you will looking at when buying a commercial property in Calgary. These two types of mortgages are:
1. Fixed Rate Commercial Mortgage – This form of commercial mortgage provides the buyer with a fixed rate of interest over the life of the mortgage and doesn’t vary over time. These are best used when the economic forecasts suggest that interest rates will go up in either the immediate or not too distant future. If the term expires before the mortgage is fully paid you will most likely be relegated to a variable mortgage rate which will be discussed in more detail next under.
2. Variable Rate Commercial Mortgage – This type of commercial mortgage means that interest rates vary in the money market. Although the monthly mortgage payment does not necessarily change, the amount applied towards interest versus principle will vary accordingly. Commercial mortgages are best used when mortgage lending rates are higher and forecasts suggest they will be diminishing over time.
You should be aware that a lender may also add a Prepayment Charge clause to your mortgage. This means that if you have the ability to pay off the mortgage before its expiry period, the lender will b entitled to receive a one time fee which they will use to offset any losses from the lack of additional mortgage income they would have received otherwise. Be very careful that you understand what this clause means to you if you intend to pay off the mortgage before its expiry date. You may find it more advantageous to try and negotiate your mortgage to have this clause removed before you sign.
Photo by RSCommercial
