The pros and cons of a commercial mortgage

When you’re looking to expand your business, you’ve probably considered a commercial mortgage. You might be ready to find some office space or to move your growing workforce into a bigger space than your existing premises. You could be looking to expand your existing premises, increase your investment portfolio or to develop a property. Whatever your motivation, a commercial mortgage is a common way to finance this.

It may be a better option for you than the alternatives, such as a normal business loan, auction finance, a development loan or choosing to rent premises instead of buying them. Before making a decision, we’ve detailed the advantages and disadvantages of taking out a commercial mortgage for you to consider.

Advantages

There are numerous advantages when taking out a commercial mortgage.

Owning your commercial premises provides your business with stability

When you own the property, you have more control over its use than you would if you rented your workspace. For example, you can monetise any surplus space in the property by letting it out.

Your mortgage payments are likely to be similar to monthly rental payments. Therefore, instead of giving your hard-earned money to a landlord, each mortgage payment increases your equity. You also don’t need to worry about unexpected rent increases. When you make improvements to the property, you enhance your company’s asset rather than improving a landlord’s property.

All in all, owning your commercial premises gives your business stability and improves your balance sheet. This business asset can potentially increase in value so it’s a worthwhile long-term investment.

You can borrow a substantial amount

It’s unlikely that your business has the cash needed to buy a property outright. This means you’ll need to borrow a large sum using a commercial mortgage. Generally, you can borrow 70 to 75% of the value for an owner-occupied property, such as an office in Bexley. For a commercial investment, such as a buy-to-let in Bexleyheath, the amount you can borrow is less than this, typically being up to 65% depending on the rental income you expect to receive.

Pay lower rates than unsecured loans — and they’re tax-deductible

Although commercial mortgage rates are higher than those for residential mortgages, they are lower than normal business loan rates. This is because your property is used as collateral and your lender will be more prepared to offer a favourable rate. Unsecured business loans present a higher risk to lenders and this is reflected in their higher rates.

Most commercial mortgages have variable rates but fixed rate deals can be found. This allows you to handle your financial planning with accuracy.

The interest payments on your commercial mortgage will also be tax-deductible.

Benefit from long-term business finance

A commercial mortgage lets you spread a large loan over many years. Typically, a commercial mortgage ranges between 3 and 25 years. This spares you from having to take a large sum of cash from your savings. Using this long-term finance for such a large expense means you can concentrate on other features of your business at the same time.

A commercial mortgage offers flexibility

You can pay off your mortgage early if you have enough capital to do so. If you choose to do this, check with your lender first as to whether an early redemption fee is payable.

On the other hand, your circumstances might change before the commercial mortgage term has ended. For example, you might want to move to larger premises or you might decide to close your business. You can still cover your commercial mortgage payments by keeping the property as an asset and renting it out or selling the premises and paying back the loan.

Disadvantages

As with most things, there are disadvantages to consider too.

It can take a while to secure a commercial mortgage

Just like a residential mortgage, commercial mortgages take a long time to secure compared with short-term loans, such as bridging finance. This is because the lender needs to carry out detailed checks on your business as well as a property valuation and legal processes. Realistically, you can expect to wait several months after beginning the process for the funds to be released.

A substantial deposit is required

Many lenders require a 30% deposit for a commercial mortgage. A large deposit is not only hard to raise but is also money that may be better spent within your company.

Although it is possible to pay a lower deposit, you’ll pay higher rates to compensate for this. The more deposit you pay, the more likely you are to get a better deal as you’re considered less of a risk to the lender. Some lenders will agree to a 100% loan-to-value commercial mortgage but you’ll be penalised with high rates and may have to provide additional security, such as your home.

Various fees are payable

You need to pay various fees to secure a commercial mortgage and these depend on your lender and factors specific to your case. They can include an arrangement fee, a commitment fee, a valuation fee, legal fees and a commercial mortgage broker’s fee.

It’s a long-term commitment

A commercial mortgage is a big commitment compared with shorter-term finance, such as a bridging loan. You need to ensure that you can maintain the mortgage repayments over the mortgage term, which could be as long as 25 or 30 years. Failure to do so can result in additional interest charges and, eventually, repossession.

Your monthly payments can increase and your capital may decrease

As most commercial mortgages have a variable rate, be aware that your monthly repayments can increase as well as decrease. Property values can also go down as well as up so be prepared for this as it will decrease your capital.

Is a commercial mortgage the right choice?

If you don’t want to commit to monthly payments over a long term, such as 25 years, then opt for a short-term loan instead of a commercial mortgage. If you have access to a substantial amount of cash and only need to borrow up to £25,000 or would rather take out an unsecured loan, then a business loan is a better option. When you need fast access to funds for your business, a bridging loan can be approved within hours and you can expect to receive the funds within a few days. This is a short-term loan that’s ideal if you have an exit strategy in place. Alternatively, you may have equity in an existing asset, in which case you should consider the benefits of remortgaging.

We recommend speaking to a specialist broker who can check your circumstances and offer independent advice on the best type of loan for your needs. Using the services of a broker can potentially save you a lot of time and money. Mortgage brokers have an in-depth knowledge of the market and can find you the best deals and most competitive rates.