Commercial mortgages vary significantly from domestic home lending, and the Revolution Finance Brokers team receives regular enquiries from clients wanting to know if this is the most cost-effective borrowing option.
Here we run through all the pros and cons of commercial mortgages, and explain how these vary from other forms of lending.
For more advice about finding the right mortgage for your business, give us a ring on 0330 304 3040 or drop an email to info@revolutionbrokers.co.uk.
Pros and Cons of Business Mortgage Lending
The first step to choosing the right form of financing is to understand all of the different commercial borrowing products available on the market.
Each option will have different costs, advantages and disadvantages, so you should consider:
- How much you need to borrow
- What premises you want to buy
- If you have a deposit or assets to leverage
Options include remortgaging existing properties, business loans, owner-occupier mortgages and commercial buy to let lending, so the right choice depends on your circumstances.
What is the Difference Between Renting Business Premises and an Owner-Occupier Mortgage?
There are several pros and cons between renting a property for your business and buying a property through an owner-occupier mortgage.
Pros of Choosing an Owner-Occupier Business Mortgage:
- Your monthly mortgage repayments are likely to be very similar to the monthly rent you would expect to pay.
- There is stability in budgeting for monthly repayments, without accounting for potential rent rises.
- The business may sublet additional space to generate rent to contribute to the mortgage repayments, subject to lender permission.
- Companies have control over how they use the space, including making changes and extensions to allow for business growth as an alternative to relocating.
- The interest paid on the mortgage is tax-deductible.
- As the property grows in value, so too does your business equity and capital balance.
Cons of Business Mortgages vs Renting a Property:
- You will need somewhere between 25% to 40% deposit.
- Relocations can be more complicated since you'll need to sell a property, which is likely to take much longer than ending a rental agreement.
- The business will need to cover all the building repairs and maintenance costs.
- If the property market dips, your building may decrease in value.
The best option when trying to weigh up the pros and cons of any business decision is to consult an expert who offers independent advice.
If you are deciding between renting or buying premises for your business to trade from, give the revolution team a call on 0330 304 3040
Is a Business Loan Better than a Commercial Mortgage?
Dependent on your circumstances and what you wish to borrow, you might decide on a business loan as an alternative to a commercial mortgage.
Business loans are usually cost-effective if you only need to borrow a proportion of the purchase cost. Examples where this might be the right choice include:
- You need to borrow under £25,000. Generally, if you need less than £50,000, a business mortgage isn't the most viable option given the minimum lending caps and the costs of taking out a mortgage.
- You are happy to borrow through an unsecured loan. Commercial mortgages require security in the form of equity or another asset, whereas business loans do not.
- You expect to pay back the loan in three years or less. In this case, a bridging loan might be a good option provided you have a repayment vehicle in place as an exit strategy.
Which is More Expensive: Commercial Mortgage or an Unsecured Business Loan?
It really depends on how much you want to borrow, and how long for.
Secured business loans are another option, whereby you use an asset or property as security, and therefore can borrow over and above the usual £25,000 maximum.
However, business loans are generally not cheaper than a commercial mortgage for higher amounts of borrowing, as the interest rates of often steeper.
Pros and Cons of Remortgaging or Taking out a Commercial Loan
Another scenario exists where you have an existing commercial mortgage, and want to raise more capital. You could remortgage the existing mortgage, or take out a business loan if you're happy with unsecured borrowing rates, and need £25,000 or less.
Each option depends on the timescales and amount you need to borrow, and a professional commercial lending broker can help you identify the most cost-effective option.
Lenders will look at several factors when deciding whether to accept an application, such as:
- Business profits
- Credit rating
- Trading history
This applies to any form of commercial lending, so it is always wise to seek independent advice before committing to any form of borrowing.
Business Mortgages Compared to Small Commercial Loans
The Revolution team often receives refinancing enquiries, from businesses trying to compare a commercial remortgage with a loan, for a small business.
In most cases, a lender will assess a small business in much the same way as a more significant organisation, with similar LTV caps, rates and terms.
Is a Buy to Let or a Commercial Mortgage Best for My Business?
Professional landlords and investors need to choose between residential BTL mortgage and commercial mortgages - and the deciding factor is who your tenants will be.
If you expect to let your property to residential tenants, then a buy to let mortgage is the right option.
However, if the premises will be leased to businesses, then a commercial mortgage is the correct choice.
How do Interest Rates Compare Between Commercial and Residential Mortgages?
Typically, the rates charged on a commercial mortgage will be higher than a residential one.
However, these are very different products, with commercial lending a bespoke product tailored to the organisation, and with a different risk assessment process.
In residential mortgages, lenders usually have fixed published interest rates, and make an offer depending on the risk profile of the applicant.
Why are Commercial Mortgages more Expensive than for Residential Applicants?
In short, commercial lending is more expensive because it carries a higher risk profile.
The interest rate offered depends on the risk perceived by the lender, which they calculate based on the below criteria:
- What LTV ratio you are borrowing at. Most commercial lenders require a deposit of 25-40%, and the higher the deposit and lower the Loan to Value ratio, the better a rate the lender can offer.
- Your business credit history. Lenders will consider your credit file, as well as those of the primary owners or directors of the company.
- Trading experience of the organisation. The longer you have been trading, and the more extensive a track record you can demonstrate, the less risky the application.
- How profitable the business is. Lenders will look at your business profits in detail, to assess whether you can afford to keep up with the commercial mortgage repayments.
Contact Revolution Brokers for Expert Commercial Mortgage Advice
Stuck in deciding which commercial lending product is the most viable for your business? Have complex borrowing requirements that fall outside of the scope of your usual high street bank?
Contact Revolution for assistance with navigating the world of commercial mortgage finance on 0330 304 3040 or email the team at info@revolutionbrokers.co.uk.
