Mortgages on Commercial Properties

If the costs of renting your business premises are increasing, you may have considered buying a property instead. Just like personal mortgages available to those buying a residential property, there are mortgages available for business owners to buy commercial property. Alternatively, if you are lucky enough to already own the property from which you run your business, you may be considering re-mortgaging the property to raise extra funds. Here, we will look at everything you need to know about, from applying for a mortgage to refinancing your property.

Purpose

If you are considering buying land or a property for your business, then a commercial mortgage could be for you. It could also be a suitable solution for refinancing or releasing equity from your property to inject into your business. As with a homebuyer’s mortgage, the money owed will be secured against the property.

As such, the mortgage can either provide funds to buy a property where your business will run from; provide cash to purchase land for development; provide money to develop or extend an owner-occupied property, such as a bed and breakfast; or help fund the purchase of buy-to-let properties.

Furthermore, business owners can also use the mortgage to acquire another company or another property to rent out. These mortgages are becoming an attractive means of borrowing money for your business, provided that there are assets to secure against the loan.

Maximum loan to value (LTV)

A lender will usually offer a maximum loan to value (LTV) of 70%, meaning you would need to put down a deposit of 30% of the property’s value. Repayment terms can range from five to 40 years. The longer the term, the smaller the monthly repayment would be, so this could potentially leave you paying less in mortgage payments than you paid in rent over the same period. Owning the property will also protect the business from future rent increases.

A mortgage-owned commercial property should start to build up equity over time, through repayment of the mortgage and increases in property prices. This equity could be used in the future as capital for further expansion. It could also be used to invest in the business, funding the purchase of new and updated equipment, or to update the property and redevelop the business.

The equity in your property could also be used to consolidate business debts into a more cost-effective repayment solution, often with a longer term than the original debt. Capital could be used to enable the sub-letting of part of the business property, helping you to realise more income from the assets you own.

As with traditional homebuyer mortgages, mortgages for businesses are provided by a range of lenders at various rates. As with personal mortgages, business borrowers need to undergo financial checks to ascertain their suitability. These checks usually include three years of business accounts, financial figures for current and future years, bank statements, details of directors and partners in the business, and details of assets and liabilities.

What about the intended use?

How you intend to use the property would determine which type of mortgage is available to you. There are different mortgages with different interest rates and borrowing levels for commercial properties and owner-occupied properties. A commercial mortgage broker from our team can advise you about this. The interest payable on the mortgage is likely to be tax-deductible, meaning you can offset the interest you pay against the profit you make and pay tax on. However, new measures introduced in the Budget in 2015 came into force on a gradual basis from 2017, allowing landlords to claim income tax relief at only the basic rate of tax even if their income sees them pay the higher rate of income tax.

Costs

Fees and stamp duty will be payable as part of the transaction. As with personal property transactions and mortgages, legal fees, an arrangement fee and administration charges are all likely to be incurred.

Stamp duty is a purchase tax with varied rates payable based on the property’s price. Have a look at the Government's website for information on non-residential property stamp duty rates.

Start-ups

If you are looking to purchase a property for a start-up company that has no revenue or profit history, or a record of trading, you will need to either find a much larger deposit or put forward security from another asset.

In many cases, this means borrowing against your personal property. However, once the business is established and has some equity you could work with a commercial mortgage broker to organise a change to this arrangement.

Commercial Remortgaging

If you already own a commercial property, you may be considering remortgaging the premises to release equity that can be reinvested back into the business. A specialist mortgage broker, such as The Mortgage Hut, can advise you on the options available to you.

You may wish to expand the business or refurbish and update the premises. Re-mortgaging can be a cost-effective way of financing this because mortgage rates will typically be cheaper than other commercial finance options.

Many clients wish to re-mortgage a property to obtain a better deal than their current mortgage. This is potentially valuable if you have had your current mortgage for some time. A remortgage would involve providing new figures, projections and a valuation which could result in you being offered a better deal and interest rate if your position has improved. Remortgaging would also give you the option to choose a fixed rate mortgage if you are concerned that the current low interest rate era is coming to an end.

Another reason to consider re-mortgaging is if you are having trouble in repaying other forms of borrowing, such as overdrafts and loans. Remortgaging could give you a more manageable monthly payment by spreading the repayment over a longer period. However, you could pay more interest in the long-term.

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