Definitive Guide to a Commercial Mortgage

By Doherty • May 13th, 2011
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Many people feel entering the property investment market a daunting prospect, and from experience many people find the funding options the most challenging, so here are some basic frequently asked questions regarding commercial mortgages.

Should I Take Out a Commercial Mortgage? That depends how much emphasis you place on wanting stability and security, a commercial mortgage gives you complete control of your work premises as you own them through your company. No matter if it’s a factory or office, most property appreciates in value, so your business will benefit from this and could benefit from a capital gain if you ever decide to sell the property.

In addition, financing premises with a commercial mortgage fixes your business costs.  Unlike rents, which can be volatile and change regularly, a commercial mortgage gives you a repayment schedule that sets out what you have to pay every month.  And, a business loan may actually be cheaper than rent.  A commercial mortgage is therefore more stable and will help you to make long term plans.

Finally, the ownership of property through a commercial mortgage allows you to sublet part of your premises.  If you have bought a property that is too big for your business you have the potential to sublet some office or industrial space to another company, allowing you to earn income towards the cost of your commercial mortgage.

What Are The Main Advantages Of A Commercial Mortgage? The benefits you could have just don’t stop there; did you know any commercial payments are tax deductable? That’s right, in the majority of cases, not all sadly so you need to double check, payments can be classed as a tax expense and deducted from your gross profits.

The next advantage on our list is you have a ready source of equity and collateral to turn to when you need an injection of capital into your business. This also helps you keep sole control of your business as you do not have to consider selling a stake in your business to raise this capital

As was already mentioned once or twice, commercial mortgages lead a more stable foundation to place your company on, without having to put up with sharp rent increases that could severely damage overheads and profit margins.

Who Is Responsible For The Commercial Mortgage Repayments? That all depends on how you have structured your business, though it still roughly follows the same set up as residential mortgages. Sole trader will have all liability and responsibility on their shoulders for the commercial mortgages, partners in a company will be responsible as a pair but also individually.

In a company structure with several directors, they will all be liable for the commercial mortgage and its repayments. Each will have to submit a personal director’s guarantee, which are necessities with most lenders, in which the directors will assure the lender they will take responsibility for the commercial loan.

How Much and Over What Term Can I Borrow? Commercial mortgages have a shorter term than residential, having a maximum term of 20 years; this could be reduced to 15 years if the building is quite old. Interest only mortgages are available, but they will only generally be interest only for the first few years of the mortgage and then revert to a capital mortgage, to help the business get up and running.

Lenders generally view mortgages at lower ‘loan to values’ as less risky.  So, the higher your deposit, the more likely you are to be approved and the lower your likely interest rate.  Many commercial lenders will require a deposit of between 20 and 30 per cent although the more you can put down; the more attractive the borrowing terms are likely to be.

 

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