As a business owner, you may decide that obtaining a mortgage on a property is wiser than paying rent every month. But before you get started, there are several things to consider.
Read our commercial mortgage guide to navigate the ins and outs of what you need to know before applying for a commercial mortgage.
What is a commercial mortgage?
A commercial mortgage is a large loan (around 75% of a property’s value) used to purchase a property. Just like a residential mortgage, where the bank or building society takes security from the property you live in, commercial mortgage providers take security from your business premises.
You can use a commercial mortgage for:
- Buying a property
- A property development project
- Buying vehicles, machinery and other equipment for your business
- Refurbishing an owner-occupied business premises
What are the different types of commercial mortgage?
Commercial mortgages can be categorised into two main areas:
Owner-occupied: This can be used for a business to purchase its current premises, or to buy new or additional space.
Commercial buy-to-let: This is where you might want to make an investment – such as buying a warehouse - and let it out to another company.
Pros and cons of a commercial mortgage
If you’re considering making this important next step, commercial mortgages have both their benefits and drawbacks.
What are the advantages of a commercial mortgage?
Choosing to purchase your own commercial property can have substantial positive impact on the value of your business. At the end of the term, you’ll have a sizable asset which you can rent out or sell on. Mortgage payments also represent a more stable financial situation going forward. Without the presence of a landlord who could conceivably alter the terms of your lease, or even evict your business without prior warning, you can focus on the future.
What are the disadvantages of a commercial mortgage?
Owning your own property comes with its risks. Firstly, in terms of the larger expense it presents, selling your business property if you want to relocate could prove difficult – and costly.
Just as you would benefit if your property were to rise in value, on the flip side your situation may suffer if the value declines. Furthermore, you would take on the full financial responsibility for keeping the property safe, secure and comfortable to work from.
What deposit is required for a commercial mortgage?
It’s likely that your business will require a deposit between 20% and 40% of a property’s value. A mortgage provider could consider lending you the remainder of the buying price. To satisfy lenders, you would have to prove that your business can keep up repayments of the loan in the long term.
Who is eligible for a commercial mortgage?
Just like any mortgage, your business needs to meet lenders’ eligibility criteria. These are some of the key factors that can impact your chances of getting approved.
- Location: Ideally, you would want your properties to be spread out rather than owning lots of properties in the same area. If the market declines in that one place, your portfolio could be more at risk. Instead, it can be a better idea to have locations in different areas around the country.
- Trading history: As with any money you borrow, lenders want to know you can afford the repayments. Limited companies that are currently trading need at least two years’ filed accounts.
- How you use the property: There are a range of commercial mortgages, so you’ll need to ensure you apply for the correct one. Owner-occupied businesses will need a different mortgage to commercial buy-to-let.
Which is the best commercial mortgage for my business?
Many factors will influence which commercial mortgage is best for your business, not least of which is the size, turnover and profit of the business itself.
There are a lot of commercial mortgages on the market, all of which have different interest rates and repayment terms, as well as various criteria to meet. Identifying the correct product for your needs may require the advice of an independent mortgage adviser.
Remember, there may be various fees and administrative charges associated with a large commercial mortgage, and that you will need to pay for a solicitor’s services when buying any property.
Is a commercial mortgage right for your business?
Although you may like the idea of buying rather than renting, you must consider whether being tied to one property is a good idea for your enterprise. Renting affords you the flexibility to grow, move to a more profitable postcode with ease, or downsize during tougher times. Be wary of buying a property that won’t meet your needs a few years from now.
For some small business owners, a commercial mortgage is a prudent move, and one that will only serve to strengthen their enterprise. For others, it is safer and wiser to remain in rented premises. Take your time and research carefully before deciding whether a commercial mortgage is right for you.
For more advice on all things finance, check out the Know How section.