One of the biggest costs involved in starting or expanding a business is commercial space. Whether this is an office, industrial site, or retail unit, businesses in many different industries require a commercial space to operate from.
If you do not have the capital available, a commercial mortgage is the most appropriate financial solution you can use to buy or re-finance commercial property. Of course, there is a lot to consider when it comes to borrowing a large sum of money, so this post looks into the world of commercial mortgages.
What are commercial mortgages?
Commercial mortgages are loans that are secured against a property that is used to run a business from. The funds from the loan can be used to buy new commercial property, refinance an existing property on a like-for like loan or to release capital – which can be used for expansion, amongst other things. Typically, loans start from £30,000 and mortgage terms range from 3 to 25 years. A deposit of at least 25% of the property value is often required and sometimes up to 40% or more.
The advantages of a commercial mortgage
For businesses and investors looking to purchase commercial property, these mortgages offer a range of benefits:
- Ability to buy or refinance property, which can free up working capital
- Gives you full control over your premises, unlike leasing a property
- Offers the possibility of capital growth over time
- Predictable payment terms and interest costs if you take a fixed-rate product
- Flexibility to facilitate growth and expansion
Important considerations
Where the full cash sum is not available, commercial mortgages are the most appropriate borrowing solution, for business owners and investors looking to buy commercial property. But, as with any financial product, there are a few important considerations. These include:
– A deposit of at least 25% is required
- The loan-to-value ratio needs to be understood for financial planning
- Repayment terms need to be aligned with projected cash flow and revenue
- Lenders may charge a valuation and/or product fee
- Broker fees can apply
- Conveyancing solicitors will charge fees
- Your credit history may affect your application
Understanding interest rates and the role of swap rates
It is also important to have a strong understanding of interest rates when applying for a commercial mortgage. Both variable and fixed interest rates are available, but rates are not influenced by the Bank of England Base Rate (a common misconception). Instead, lenders use swap rates to determine interest, which are forward-looking projections of money markets. This means that the base rate coming down will bring mortgage rates down, but in reality, lenders have anticipated this change weeks prior and made product changes.
The role of mortgage advisors
Of course, there is a lot to consider when it comes to commercial mortgages. This is why it is wise for business owners and investors to speak with trusted UK mortgage advisors. Trusted advisors can provide guidance based on your individual needs and circumstances and find the best commercial mortgage for your needs by comparing products from a wide range of lenders. This can provide peace of mind and could help you make significant long-term savings.
Commercial mortgages can be useful financial products for purchasing business property or expanding operations, but there is a lot to consider. The information in this post should be useful and help you make confident, informed borrowing decisions.