What is a Construction Mortgage?

A commercial construction mortgage is a property loan that is taken out when a business owner needs to build or improve their existing commercial property, or when they want to build an entirely new building to run their business out of. Construction mortgages can cover the costs of the work while it’s being completed, and they can then often turn into a standard commercial mortgage.

Typically when construction mortgages are first set up, the entire amount of the loan is not given out all at once at the beginning. Instead, release dates are set up and at these times, a certain portion of the total amount of the loan will be released in order to cover the costs of the next part of the project. The schedule is set up this way so that the amount needed at the time is available.

However, because the entire loan amount is not released at the beginning of the loan, commercial construction mortgages also typically work on an interest-only basis during the time of the project. Each month the borrower will only be responsible for paying the interest that has been accrued, on the amount that has been given, for that time. Once the project is complete, the entire amount of the loan will then be due, or it can be turned into a typical commercial mortgage. When business owners choose this route, the interest rate often drops slightly, as those on construction mortgages are typically a little higher than on commercial mortgages.

Construction mortgages can be very beneficial not only because they cover the costs of a construction project, but also because it saves the business owner from applying for two different mortgages. Commercial mortgages can already be an intensive process, requiring a lot of time and documentation, and construction mortgages can roll two mortgages into one – covering the costs of both the building or renovating of your space, as well as any mortgage you may need afterward, such as when it’s an entirely new property you’re building.

Because there are two different portions to the loan, it’s also important to note that the construction mortgage will most often work on a variable interest rate, but this can be turned into a fixed rate once it turns into a typical commercial mortgage.

Construction mortgages can be tricky to understand because so many different factors and elements are taken into consideration. When looking for a construction mortgage for your business, speak to a qualified commercial mortgage broker that can help you understand all the ins and outs of these loans, and help you find the best one!

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