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What is a Commercial Mortgage?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 August 2016
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    Conjecture Corporation
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Commercial mortgages are mortgages that are extended with the use of a commercial property as the collateral for the loan. The commercial property is generally expected to currently be in active use by a business, but this is not always the case. The use of commercial property as collateral helps to ensure the lender that even in the event of default, recovery of the loan is possible.

The commercial mortgage is thought of as the one of the most common type of business loans. Corporations that wish to expand by purchasing property adjacent to currently owned facilities will often use a commercial mortgage to secure the additional land and buildings. Generally, the real estate that is already owned by the corporation will serve as the collateral, although the acquired property may also be used as the security for the loan.

A commercial mortgage is often a better option for financing the purchase of new property or the enhancement of currently owned facilities, simply because it does make use of collateral to secure the loan. Because mortgages of this type do require collateral, the borrower is usually offered a better rate of interest than with signature loans and other types of business funding. The collateral provides the lender with the right to foreclose and sell off the property in order to settle the debt if necessary, so the degree of risk to the lender is reduced.

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It is important to note that residential property can never be used as the collateral for a commercial mortgage. For example, a new business owner could not take out a commercial mortgage using his or her private home as the collateral on the loan. However, this does not mean that all residences are exempt from being used as collateral. Apartment complexes that include more than four units are considered to be commercial property in many jurisdictions, and would thus be eligible for use as collateral on a commercial mortgage.

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dmaw
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What liability does the shareholders have if the commercial property is foreclosed?

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