for expansion and reinvestment, and secure a business property for posterity. Yet commercial mortgages require careful preparation—they are markedly more complex than a typical residential mortgage, and an ill-suited mortgage can cut into profits or even break a business.
In many ways commercial mortgages are similar to residential mortgages. They are essentially a loan against property, generally for an office shop or warehouse premises and the different types should sound familiar to any homeowner - repayment, interest-only, variable rate, fixed rate etc. But because they present a greater investment risk to both the lender and the borrower, and because a business is usually quite complicated, commercial mortgages are costlier and more time-consuming.
To business owners, a commercial mortgage has many advantages over leasing. Not only are interest payments on commercial mortgages tax deductible, but those payments are likely to be similar to the rent payments on a to-let leased commercial property. Perhaps most importantly, upon completion of the mortgage period , the property is yours, along with any increased property value.
This does translate into quite a bit more risk, however. Under a commercial mortgage, all of the upkeep and repairs are the borrower’s responsibility. As well, loss of property value could create negative equity.
When obtaining a commercial mortgage, it is necessary to prepare on multiple fronts. First, a proper location must be found and approved by a solicitor and chartered surveyor. Prior to approaching any lenders, a business must organise a large amount of information. At the minimum, this will include audits for the previous few years, data on current performance, a detailed business plan with profit-and-loss projections, and profiles and asset and liability reports for each business partner.
If the commercial mortgage includes the existing business for sale and not just a property, then the lender will also require detailed information on the existing business’ performance. After this extensive portfolio is readied, you can begin the search for a suitable mortgage. We have access to an independent commercial mortgage broker who can then search the whole of the market to find your business the best mortgage. This is the easiest route to take since commercial mortgages are a rather specialised field and high street banks are probably not the first place to look. There are lending institutions dedicated to commercial mortgages, and that is why a broker is indispensable.
The standard commercial mortgage is based on a variable rate—the interest is set to a margin above the Bank of England’s base rate or other rate, and fluctuates accordingly. Other common types of commercial mortgage are fixed rate and capped rate. In a fixed rate mortgage the interest is set at certain rate for a set period—usually two to five years. In a capped rate mortgage the interest cannot rise above a set rate, but it can drop if the variable rate does. Like the fixed rate, capped rate mortgages revert to variable rate mortgages after a set number of years.
However, to reflect the inherent risk in commercial mortgages the interest rates are pegged a multiple per cent higher than standard residential mortgages. Lastly, the deposit on a commercial mortgage can be quite hefty, often as much as 40% of the worth of the loan is required.
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