Commercial mortgages can be a cost-effective solution to purchasing business premises, expanding into a more significant site, or investing in a building to rent out.
Businesses have a vast range of options when it comes to borrowing, particularly if you have a property to use as security against the funds, such as:
- Bridging loans and/or auction finance.
- Short-term business loans.
- Secured borrowing.
- Asset finance.
If you’re unsure whether a commercial mortgage is the right option for you, the Revolution Brokers team has created this guide to run through the advantages on offer – and the pitfalls to keep an eye out for!
For more information about commercial mortgage rates, eligibility criteria, and independent guidance to help you compare the alternatives, please get in touch on 0330 304 3040, or drop a message to [email protected].
Commercial Mortgages – How it Works
In essence, a commercial mortgage is the same as a residential home loan, but it’s used to purchase a property through a business.
You can opt for repayment or interest-only mortgages (although a lot depends on how much you’re borrowing!) and pick and choose between fixed-rate deals and variable interest payments.
However, commercial loans are a great way to invest in a property for any reason and don’t just apply to businesses looking to buy somewhere to trade from.
Examples of commercial mortgage applications include:
- Property developments – of a new or existing site.
- Renovations and extensions.
- Developing or renovating residential areas.
- Buying land.
- Commercial developments.
Another critical factor to bear in mind is that the FCA doesn’t regulate commercial mortgages in the same way as residential mortgages.
That doesn’t mean they’re in any way untoward but does mean you’ll find a substantial range of products, rates and charges. Therefore, we strongly advise working with an independent, whole-of-market commercial mortgage broker to avoid paying more than necessary.
The Advantages of a UK Commercial Mortgage
Buying a premise as a business strategy is often of significant benefit. It’s usually more cost-effective than renting and means you’ll have a tangible asset on your balance sheet.
To summarise the benefits of owning a commercial building:
- Interest rates are typically lower on a commercial property mortgage than any other form of unsecured borrowing.
- Monthly repayments on a fixed-rate loan are static, so you can easily budget and forecast knowing that the outgoing cost won’t change from month to month.
- Buying a premise can result in excellent capital gains and be a smart way to realise capital growth over the long term as property values rise.
- Rental commercial premises offer a way to generate an additional revenue stream. Businesses can let out part of a unit as a multi-purpose investment, both as a rental property and a trading premise.
- Commercial mortgages are usually arranged over a longer-term than other borrowing products, which means lower outgoing costs and the ability to focus on reinvesting in other areas of business growth without heavy repayment charges every month.
Most British businesses find that the monthly mortgage cost is very similar – if not lower – than their rent.
As a way to purchase a property, see increasing equity each year and have the assurance of a reliable, outgoing expense, a commercial mortgage carries many benefits.
If your business needs change, you can remortgage onto a better rate, or exit a mortgage without any substantial issues, provided you’ve chosen a flexible product that matches your company’s expectations.
For example, if the business closes, you can sell the property and repay the mortgage.
Alternatively, you might rent out the unit and use the income to cover the mortgage costs while retaining the property as a long-term investment asset.
The Downsides to a Commercial Mortgage
Here at Revolution Brokers, we believe in absolute transparency and that you must understand all the potential pitfalls of any financial borrowing product you apply for.
With thousands of products on the market, a broker is vital to deliver tailored advice to ensure you don’t take out any borrowing that doesn’t provide competitive rates and the flexibility you need.
Some of the downsides include:
- Needing a substantial deposit – commercial mortgages will command a sizable down payment, depending on the value of the property you wish to buy. It can be tough to put together a cash deposit, particularly if you have cash flow restrictions or are trying to grow your business in other areas.
- Property maintenance costs – renting a unit isn’t always a great long-term solution, but one of the positives is that the landlord will generally be responsible for maintenance and repairs. If you buy a premise, all of those costs fall to your business to cover.
- Uncertain returns – while we know that property prices tend to creep up year on year (and are forecast to rise considerably over the next few!) – there isn’t a guarantee. Property prices do change, and if you plan on selling reasonably soon, you have an increased risk that a short-term downturn will mean your unit is worth less than you paid.
- Interest rates – we’ve mentioned that commercial mortgages aren’t regulated the same way as residential loans, and that means you need to have diligent oversight about what you’re paying. Variable interest rates are also a risk since there is a chance that your monthly payments will rise suddenly, without much notice.
Seeking independent advice from a skilled broker successfully mitigates each of these issues.
Revolution works with hundreds of UK businesses, landlords and investors, with whole-of-market advice to ensure you only select the most competitive commercial mortgages and at terms that meet with your business aspirations.
To discover more about whether a commercial mortgage is right for you or discuss your plans and which borrowing products our experienced consultants would recommend, please get in touch.
Our offices are available on 0330 304 3040 or send us a message to [email protected], and we’ll arrange a convenient time to connect and steer your borrowing requirements in the right direction.