Commercial Mortgages


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Commercial Mortgages are loans that are secured on commercial property such as shops, business offices, warehouses, factories, garages, hospitals, schools etc. and can be used for taking over an existing business, purchasing a brand new building or buying land.

Most banks and building societies offer commercial mortgages, but you must satisfy their criteria. Most lenders require a positive personal credit rating and clear evidence that your business is creditworthy, although some lenders may accept applications where there is an adverse credit history.

Mortgages are structured several different ways but the two important aspects to consider are the interest rate and the repayment schedule for the mortgage.  As with residential mortgages, fixed and variable rate deal are available for commercial mortgages.

Commercial Fixed Rate Mortgages

These feature a set interest rate for a fixed period of time. Once this period has ended the normal variable rate is paid. Arrangement fees are normal when taking this type of mortgages.

The majority of fixed rate products will be priced over 3, 5 and 10 year fixed mortgage terms, with 3 and 5 year fixed rates being the most common.  Commercial mortgage fixed rates are priced higher then residential mortgages and should therefore not be used a benchmark in product selection.

People tend to choose a fixed rate mortgage when they expect interest rates to rise or need to stabilise their monthly payment amount.

Commercial Variable Rate Mortgages

The variable interest rate is an interest rate that mirrors and changes to the Bank of England's Base Rate. The market rate and a set premium remain unchanged throughout the mortgage and constitute the interest rate for each period. Remember that you can initially get a lower interest rate on variable interest rate than on a fixed rate mortgage. and current pricing between the BoE Base Rate and LIBOR offerings are at their highest due to market liquidity.

The advantage of a variable interest rate mortgage is that you save money when the market rate decreases. The flip side to this is that you are not covered from an increase in the market rate. This simply means the interest rate you pay will increase with the market rate.

Where suitable elements of the bespoke loan structures available can include interest only mortgages (in the majority of cases for a period of the mortgage term) and long term repayment terms up to approximately 30 years (with initial discounted periods).

It is important to bear in mind that mortgage lenders will offer better rates to certain property types and businesses with strong proven track records.

Is a Commercial Mortgage right for me?

Some business are faced with the question of whether it is best to buy or rent business premises.  You might want to bear in mind the following pros and cons before deciding to take out  acommercial mortgage.

Advantages of taking out a Commercial Mortgage

  • Your mortgage repayment is likely to be similar to a rental payment on the same property
  • You aren't exposed to any sudden rent increases
  • You may be able to sublet any free space, reducing your monthly repayments (you may require permission from your lender to do so)
  • Interest payments on a commercial mortgage are tax-deductible
  • Any gain in value of the property will increase your capital thus giving you the ability to raise money for working capital or an injection of cash flow
  • As your business grows, you may be able to extend your existing premises, avoiding relocation costs

Things to bear in mind with Commercial Mortgages

  • Unlike renting, you'll need to come up with a substantial deposit and this is money that might be used for more important purposes
  • If you own premises, you may find it difficult to relocate your business, because selling business premises is not always easy. If you rent, you may be able to negotiate to end your rental agreement, or to find another organisation to take over your tenancy
  • If you have a variable rate mortgage, you are exposed to increases in interest rates
  • Owning a property means you'll be responsible for factors such as maintenance, fixtures and fittings, buildings insurance, decoration and security
  • Property prices can go down as well as up, so any fall in the value of the property will decrease your capital
  • If you fall behind on payments, it can lead to your property being repossessed and have a negative impact on your credit status

Useful Links

>>> Mortgage FAQs
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Commercial Mortgage Guide from Business Link (pdf)

 

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