Commercial Mortgages Buying Guide
How it works
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 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 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 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.
When deciding on your repayment schedule you should always
remember the longer you take to payback the principal the
higher your total interest payment will be:
"Equal" Payments: Probably the most common schedule,
this type of mortgage requires you to pay the same amount
each period (monthly or quarterly) for a specified number
of periods. Part of each payment covers the interest and
the rest reduces the principal.
"Equal" Payment and a Final Balloon Payment: This
type of mortgage requires you to make equal monthly payments
of principal and interest for a relatively short period
of time. After you make the last instalment payment, you
must pay the balance in one payment, called a balloon payment.
Some lenders will give you the option to refinance the mortgage
to help you stretch out the final balloon payment. This
type of mortgage offers definite benefits to you. Because
of the lower monthly payments during the course of the mortgage,
you can keep more cash available for other needs. Of course,
when you are thinking about those nice low payments, don't
forget the big balloon payment waiting around the corner.
Interest-Only Payments and a Final Balloon Payment:
With this type of mortgage, your regular payments cover
only interest. The principal stays the same. At the end
of the mortgage term, you must make a balloon payment to
cover the entire principal and any remaining interest. The
obvious advantage of this arrangement is the low periodic
payments. But over the long term, you will pay more interest
because you are not reducing the principal sum on which
you pay interest.
Endowment Mortgage: This type of mortgage is similar
to an interest-only mortgage but the repayment of the principal
comes from the proceeds of an endowment. Several types of
endowments are eligible for this type of mortgage, they
include: life assurance policy, personal or executive pension
plan policy, or a personal equity plan. The additional security
provided by the endowment usually result in a lower interest
rate.
