Are you are looking to expand your business? Have you realised that the cost of renting has become too great? If so you might find that a commercial mortgage can offer you options and business finance you weren’t aware of. Here’s everything you need to know.
There are a lot of lenders offering commercial mortgages. Which one you choose is important. Rates can vary, as can commercial speciality. Some lenders offer mortgages only when there is plenty of asset security available, others prefer to lend to owner-businesses while some only fund land development ventures.
The loan term can also vary dramatically – often from 5 to 40 years. With a big financial commitment you had better make sure you understand what you want from your commercial mortgage and what your mortgage lender wants from you before signing.
What information is required?
Any potential borrower is going to be subject to certain financial checks. These usually extend to:
- three years of accounts (or tax returns)
- current and projected performance figures
- bank statements
- details and profiles of all directors and partners of the business
- asset and liability statements
Repayment options
Interest rates are typically higher than with residential mortgages as the lending is seen to be higher risk. You will also likely be required to offer a greater deposit, usually, at least 30%, which equates to a lower loan-to-value (LTV) rate and the upside is often greater equity.
Your credit history
This will count a lot in whether or not your commercial mortgage application goes through. Can you afford to repay it? However, it isn’t always the single focus that is considered; you will also need to provide a comprehensive picture of your company including projections and a business plan.
Commercial mortgages for start-ups
Simply put, if you are looking to buy premises for your start-up business without any trading history, then you will find yourself needing a much lower LTV ratio, often less than 50%. You certainly won’t be able to expect to purchase a property mortgage valued in the millions!
Security and Equity
When raising the cash required to fund your property purchase, lenders will often realise that many companies are asset-rich but cash poor and accept security from an existing property.
Using a commercial mortgage to secure your property can assist the future financing of your company. If the property goes up in price then your business capital does likewise and as the equity rises then you can use this equity to provide further funding for growth or expansion.
Property usage
Not all commercial mortgages are the same; what and how you choose to use your property will affect both the amount you can borrow and the interest rate offered.
For instance businesses like hotels and shops will be viewed differently from a car showroom or nightclub. If you choose to buy an office block for your business and then choose to redevelop and sublet part of the space, your commercial mortgage has gone from an owner-occupied business to an investment business. In many cases, this will incur a drop in your LTV.
Some other things you ought to know…
Stamp duty – a land tax that is payable on all properties and the rate varies, but for a £500,000 property, the amount you currently pay is £20,000.
Interest rates – variable rates are set against the Bank of England base rate and will ‘vary’ depending on the set rate at the time. Fixed rates can be set for a certain period (often up to 5 years) offering guaranteed repayments which can be calculated into business projections.
Fees – as with a residential mortgage expect to pay a conveyancing (legal) fee, an arrangement fee, a valuation fee and an administration charge.
Renting out your property – a popular and viable option for business owners to maximise the earning potential of their premises and offset the cost of their repayments.
Refurbishment – always take into consideration the cost of renovating, installing facilities, decorating and general refurbishment of your new property (like any residential property purchase, 1980s disco wallpaper still isn’t a good look!).
Tax – the interest repayments on your commercial mortgage are tax-deductible.
Always explore your funding options carefully, to find out more about commercial mortgages, give us a call at 03330 069141 to talk through your options or request a call back below.
