By Timothy Frodsham
Commercial
mortgages and business loans are the ideal way for you or your company
to buy business property. Whether you are a company looking to buy your
own offices, factory or warehouse or you are an individual looking for a
commercial property investment, specialist commercial mortgages and
business loans can provide you with the capital needed to fund your
purchase.
Whilst there are some similarities between commercial and residential mortgages - a lender will generally advance a sum of money secured against the property you buy - there are some major differences. Our guide highlights five things everyone should know about commercial mortgages.
1. Deposits for commercial mortgages are higher than for normal home loans: When you decide to purchase a residential property, you will normally have to put down a deposit of at least 10-15 per cent of the asking price. Depending on how risk averse the lender is, will determine whether or not they will require higher deposits, particularly to secure the very best interest rates. Lenders may take into account all manner of personal circumstances before they calculate the size of deposit they will require.
With commercial property, the deposit has always been higher, before the credit crunch you could expect to need a deposit of 25%-30% minimum, at the time of writing and since the credit crunch; many lenders will require a deposit of 30-40% minimum for a commercial mortgage. If you can beat the minimum. You will be eligible for much better interest rates from lenders, but the deposit is a big ask to be begin with, so it's unlikely.
2. A Personal Guarantee Will Be Needed: Commercial mortgages can be commissioned and taken on by either an individual, business partners or in the company's name. If you do want to put a commercial mortgage under your company's name, then the lender will require personal guarantees from each of the board of directors. In other words, if the business can't afford to keep up with the mortgage repayments then it falls to the personal responsibility of the directors to meet the mortgage payments.
3. Commercial Mortgage Payments Can Be Tax Deductible: Not the whole payment will be deductible of course, but HMRC will class the interest payments of the mortgage tax deductible, the capital part of the payment will not be. A major bonus when it comes to filing the tax returns for the financial year!
4. Commercial Mortgages Can Be Cheaper Than Commercial Lending: It's a common misconception that a commercial mortgage is the most expensive financing option, people see the word mortgage and deem it expensive and too burdensome a commitment. But if you compare it to standard commercial loan or covering expenses with credit cards and company overdrafts, the interest rates are much more favourable with a commercial mortgage than any of the above as the lender has the property as security against the mortgage.
So, many companies use commercial mortgages not only to buy premises, but also to take the sting of exorbitant interest rates out of their business. Think how much money you might be able to save this way?
5. Commercial mortgages may be structured differently to residential mortgages: Many residential lenders will allow you to take out your mortgage on an interest only basis. However, a commercial mortgage will generally have to be repaid on a capital and interest (repayment) basis. A lender may allow you to make interest only payments for a year or two but the loan will generally have to be converted to a repayment basis after this time.
Also, many commercial mortgages are set up on a 'quarterly payment' basis, reflecting the business year. This means that interest payments are calculated every three months rather than on a normal monthly basis.
Whilst there are some similarities between commercial and residential mortgages - a lender will generally advance a sum of money secured against the property you buy - there are some major differences. Our guide highlights five things everyone should know about commercial mortgages.
1. Deposits for commercial mortgages are higher than for normal home loans: When you decide to purchase a residential property, you will normally have to put down a deposit of at least 10-15 per cent of the asking price. Depending on how risk averse the lender is, will determine whether or not they will require higher deposits, particularly to secure the very best interest rates. Lenders may take into account all manner of personal circumstances before they calculate the size of deposit they will require.
With commercial property, the deposit has always been higher, before the credit crunch you could expect to need a deposit of 25%-30% minimum, at the time of writing and since the credit crunch; many lenders will require a deposit of 30-40% minimum for a commercial mortgage. If you can beat the minimum. You will be eligible for much better interest rates from lenders, but the deposit is a big ask to be begin with, so it's unlikely.
2. A Personal Guarantee Will Be Needed: Commercial mortgages can be commissioned and taken on by either an individual, business partners or in the company's name. If you do want to put a commercial mortgage under your company's name, then the lender will require personal guarantees from each of the board of directors. In other words, if the business can't afford to keep up with the mortgage repayments then it falls to the personal responsibility of the directors to meet the mortgage payments.
3. Commercial Mortgage Payments Can Be Tax Deductible: Not the whole payment will be deductible of course, but HMRC will class the interest payments of the mortgage tax deductible, the capital part of the payment will not be. A major bonus when it comes to filing the tax returns for the financial year!
4. Commercial Mortgages Can Be Cheaper Than Commercial Lending: It's a common misconception that a commercial mortgage is the most expensive financing option, people see the word mortgage and deem it expensive and too burdensome a commitment. But if you compare it to standard commercial loan or covering expenses with credit cards and company overdrafts, the interest rates are much more favourable with a commercial mortgage than any of the above as the lender has the property as security against the mortgage.
So, many companies use commercial mortgages not only to buy premises, but also to take the sting of exorbitant interest rates out of their business. Think how much money you might be able to save this way?
5. Commercial mortgages may be structured differently to residential mortgages: Many residential lenders will allow you to take out your mortgage on an interest only basis. However, a commercial mortgage will generally have to be repaid on a capital and interest (repayment) basis. A lender may allow you to make interest only payments for a year or two but the loan will generally have to be converted to a repayment basis after this time.
Also, many commercial mortgages are set up on a 'quarterly payment' basis, reflecting the business year. This means that interest payments are calculated every three months rather than on a normal monthly basis.
