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A 100% commercial mortgage may hold the answer. Unlike traditional mortgages and many standard business mortgages, a 100% commercial mortgage requires no down payment, so you don't have to pay out cash in a big chunk up front. This can be a major advantage if you're just getting a business off the ground, or if you simply need to keep your cash assets liquid.
How a 100% Commercial Mortgage Works
Like any other mortgage, whether it be residential or for business purposes, a 100% commercial mortgage is a secured loan. That means that you put up property or assets as a guarantee that you will repay the loan. If you miss payments or default on the loan, the lender has the right to take possession of your assets and liquidate them to get its money back.
In the case of a commercial mortgage, that security is generally the property for which the loan is sought. In addition, some banks may require additional collateral in the form of other property or assets before they'll approve your application.
If you are taking a 100% commercial mortgage to start a business, your bank or building company will nearly always require that you file a business plan which their lending officers will evaluate before deciding whether or not to lend you money.
Why Choose a 100% Commercial Mortgage?
The best reasons for choosing a 100% commercial mortgage, of course, arise from the fact that there is no need to put down an up-front payment on your property. There are many reasons why a business owner would decide to pay higher interest rates in return for a 100% finance deal.
- Your business may not have the capital to provide a down payment, but does have assets that can be provided as security.
- When you take out a 100% commercial mortgage, your cash assets are available for other purposes to build your business.
- Your cash assets can continue to accrue interest or be used for investment purposes rather than being spent.
- You keep a portion of your assets liquid to meet unexpected expenses.
- Interest payments on your mortgage can be offset against taxes.
With a 100% commercial mortgage, you generally trade a higher interest rate and higher monthly payments for the advantages of holding on to your cash assets longer.
What Are the Disadvantages of a 100% Commercial Mortgage?
The most obvious disadvantages of deciding to take a mortgage with no down payment required have to do with paying more interest on your loan.
- Since you are not putting down a significant amount of the purchase price for your business property, you will be taking out a loan for more money. That means that you'll be paying interest on a larger sum.
- Since you are borrowing more money, you will probably be making higher monthly payments to pay off your loan in the same amount of time.
- Banks and finance companies often charge higher interest rates on 100% mortgages, since they are substantially riskier for the bank.
That means, of course, that you will have to bring in more per month in order to meet your mortgage payment before your business can show a profit.
Buying a home comes with so much expense these days that buyers look for ways to cut down the costs. Monthly repayments can seem much more manageable than huge up front costs ? said to average over ?25,000 these days ? so many people buy a house are tempted to increase their mortgage to cut down on initial expenses.
One way to do this is to take out a 100% mortgage, thereby negating the need for a deposit, which can be a great up-front saving.
A lender might change the criteria in assessing the loan of more than 95% of the property's value. In these days of tightened lending criteria and the credit squeeze, this may well mean a higher interest rate. In the long term, therefore, 100% mortgages will cost more than lower loan-to-value mortgages, but waiting and waiting to save a deposit could mean that you wait ?forever? to get on the property ladder. Your options to swap lenders or move in the early years may also be restricted by borrowing more than the purchase price.
If you do take out a mortgage, you will have no equity in your property. This means that if your property falls in value, you will be in a situation of negative equity ? you will owe more on your loan than your property is worth, and at some stage your original loan will still need to be repaid.
Of course, over the long term the value of property tends to go up, and over the course of a full mortgage term ? 25 years ? there is little doubt that the value of your property will rise above the amount of the loan. However, you will probably want to move before that time (not many people stay in a single property for 25 years these days) and when you do move a dip in house prices might take you into negative territory.
Some lenders offer even more than 100%, as there may be circumstances where you need or wish to borrow more than the value of the property to cover other costs associated with buying a house. For example the Abbey has a 100% Plus Mortgage in which, in addition to 100% of the value of the property, you might be able to borrow up to a further ?25,000 up to a maximum loan-to-value of 125%. The Abbey doesn't mind what you actually use the money for. You may wish to consolidate your outstanding debts, renovate your new home or even buy a new car.
For 100% mortgages lenders will typically lend up to five times a single income or four times joint incomes. The figures will vary from lender to lender based on how much you earn and number of financial dependants. Your credit score is also crucial. In the best circumstances you will probably be able to borrow up to five times joint income, but this sort of deal is usually reserved for applicants with ?100,000 of income and who can clearly demonstrate affordability and have a high credit score.
To get on the property ladder without having to save for a deposit 100% mortgages are ideal.