Using a commercial mortgage to buy your business premises

For many new and smaller businesses, the costs of buying property make renting the most viable way to secure commercial premises. But for those who can spare the capital to fund a deposit and other associated costs, owning your business premises can have many advantages.

A recent survey carried out by HSBC bank found that 40% of UK companies between 6 and 10 years old still lease their business premises. Of the businesses surveyed 70% believed that owning their premises would have a positive impact on growth.

Pro's and con's of owning your business premises

Buying your commercial premises can provide stability, be a good investment and the property can become a significant asset to the business. Even so, buying property is a major commitment and you should be fully aware of all the risks before you proceed.

Some of the advantages of buying your business premises include:

• Mortgage repayments are often at comparable levels to rental costs on the same property
• No unexpected rent increases
• Interest payments are tax-deductible
• With the permission of your lender - you can sub let to generate extra revenue
• Increases in property values will increase business capital
• Freedom to move without being tied to a fixed term lease

Some of the disadvantages are:

• A variable commercial mortgage rate exposes you to rises in interest rates
• There is a risk of negative equity or repossession if you can't keep up the repayments
• A deposit of 10%-30% will be required. Can you afford for valuable capital to be tied up in your property?
• Selling a business premises can be difficult. You could be hindered if you need to relocate.
• As the property owner you'll be responsible for costs of maintenance, security, insurance etc.

Using a commercial mortgage loan to fund the purchase

Whilst the cost of a commercial mortgage loan can be more than for a residential mortgage, they can be structured in a number of ways to suit your cashflow needs and business plans. The main factors to think about are which type of interest rate and repayment schedule will support your needs best.

The interest rate options you can choose from are variable or fixed.

• Variable interest rate - the interest charged on your loan will fluctuate in line with the Bank of England Base Rate or LIBOR rate. This means that your payments will also change and you should budget for any increases. However, you will also benefit from any rate reductions.
• Fixed interest rate - the ineterst rate charged is fixed from the start of your mortgage and lasts from two to five years depending upon the lender and deal. Although the rate will be higher than a variable rate mortgage, you will be protected from any rate rises during the fixed rate term. Likewise, you will not benefit from any rate reductions during the fixed rate period. At the end of the fixed term the rate will most likely revert to the variable rate.

With most lenders you can choose one of a number of ways to repay the mortgage that fits your needs best. However, it's important to remember that the longer you delay repaying the original capital loan, the greater the total interest cost will be.

What will a mortgage lender want to know about you?

Whilst commercial mortgages are more complex than residential mortgages, lenders still need to assess the risk of lending money to your business before they will approve your application. Basically, they have three main concerns and will want to know that:

1. You can afford the repayments and will pay the money back
   Most lenders will require some financial information about your business to ensure you'll be around long enough to repay the mortgage. This is likely to be more comprehensive with traditional lenders and include audited accounts, profit and loss forecasts, asset and liability statements, bank statements and some lenders may require a business plan. We have access to a number of lenders who don't require many of these items.
   
2. The property being mortgaged is worth enough to pay off the loan if you defaulted
   The lender will instruct a valuer to assess the current use and market value of the property.
   
3. The property could be sold quickly on the open market
   The lender will also want to know if the property could be converted for alternative use to make it easier to sell if repossessed. For example, could a shop be converted into flats or offices?

What commercial mortgage deals are available?

The UK commercial mortgage market is changing fast with increased competition driving down rates and increasing the range and flexibility of mortgage products.

However, the less of a lending risk you are as a business, the greater your chances of securing the best commercial mortgage rate. Therefore, the terms you are offered will be directly related to the level of borrowing you need, your business performance and the status of the property to be mortgaged.

A typical commercial mortgage has a term of 15-25 years and lenders usually charge a fee of between 1% and 1.8% for standard rate deals increasing to as much as 4% for businesses with trading problems or other issues which increase the lenders borrowing risk.

The first port of call for most businesses will be their bank but, in many cases, this can result in higher rates, charges and deposits. Bank  mortgages are often far less flexible than specialist lenders can provide.

Fees and other costs

Application costs for commercial mortgages are higher than residential mortgages so it’s important to get an accurate quote of all fees and charges so you can assess the total cost before you commit to any one deal.

In addition, there will be legal expenses to be paid at closing such as a site survey fee, title insurance and various fees for preparing the legal documents.

Summary of the points you should consider

• Can the business afford to provide a deposit of at least 10%?
• Are you happy to keep your business located in it’s current location for the medium to long-term?
• Could you cope if interest rates increased during the mortgage term?
• Have you considered the cost of ongoing property maintenance etc?
• Are you comfortable with the risks?

Where to get further advice on a commercial mortgage

As with any financial product, it’s prudent to shop around and take the advice of independent experts to give yourself the best chance of securing a good deal with a lender who best understands the nature of your business. A commercial mortagage broker can compare your needs with a range of lenders and schemes from across the UK market.

If you feel that a flexible commercial mortgage could help your business to have more control and freedom, please contact us without obligation for free help and advice. Alternatively, please complete the enquiry form at the bottom of our commercial mortgage page.