Commerical Mortgage

[Hurling Fan]

Hi, don't know anything about commercial mortgages and finding it difficult to find rates on AAM or through google. Anyway, a friend was showing me bank statements on his commercial mortgage. Paying 7.25% which seem huge to me - just wondering if this is the norm or is there better value out there. Thanks

 

[Yellow Belly]

Commercial mortgages are completely different to residential mortgages in that all cases & rates are assessed on an individual basis. For this reason no institution can publish a "commercial mortgage interest rate schedule" like they do for residential with clearly defined variable & fixed interest rate options.

Each commercial case is assessed on the following criteria:

1. Financial strength of the applicant- his existing business, his existing borrowings etc
2. The business/commercial property he is buying & which sector of business it trades in
3. Loan to Value
4. Security items- the value of the property itself- the potential to use it for other purposes etc

Based on the above a commercial application will be either approved or declined. Rates are then usually offered as a margin over "Prime" or the 90 day Euribor rate. i.e. 90 day Euribor + 2%.

The fact that Euribor is utlised to price commercial deals is partly the reason for why commercial rates have been over 7% recently, as Euribor rates had increased signifigantly with the global credit crunch. For example while the ECB rate today is 3.75%- the 90 day Euribor rate is 4.70%.

Many institutions might as well be closed to commercial business at the moment as they are finding it really difficult to source competitively priced funds to lend to consumers. Best chance of getting a better deal is to seek the services of a good quality independent broker who could maybe submit a few applications, and then play one off against the other to reduce the margin being charged.

 

[demoivre]

Current 3 month Euribor is around 4.733% so the margin being charged on your mates mortgage is 2.517 points at 7.25% - I'd say up to about 2.5 points above Euribor is more typical for a standard commercial mortgage. Last year, before the credit squeeze, you could have got a regular commercial mortgage at around 1.6 to 1.8 points above Euribor - more expensive now though !