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.
There are of course some similarities between commercial and residential mortgages, all mortgages will have the same core DNA – a lender will lend you the capital to buy a property and use the same property for security if you cannot keep up with repayments. Yet the differences and complexities between the two are wide, out guide below highlights the five major essentials to be aware of when securing a commercial mortgage.
1. A higher deposit than normal will have to be paid for a commercial purchase: Ordinarily, when you are buying a residential property, you will have to find a deposit of about ten to fifteen per cent of the price of the property. Some lenders will demand higher deposits, especially to secure the very best interest rates.
When you are taking out a commercial mortgage, the rules are different. It is quite common for a buyer to have to offer between 30 and 40 per cent of the purchase price, this is a reflection of the increased risk that the banks feels it is being exposed to (as we all know, banks are increasingly risk averse these days). Investing in commercial property may therefore require you to commit a significant amount of your own cash.
2. You may need to provide a personal guarantee: Many buyers look to purchase the commercial property in a company name. However, what happens if the company cannot make the repayments? To avoid this situation, many commercial mortgage lenders will insist that the directors of the company provide a ‘personal guarantee’ – a commitment that they will personally keep up the mortgage repayments should the company fail to pay.
3. Duty free? If you borrow a commercial mortgage, HM Revenue and Customs (HMRC) tend to treat the interest payments on the loan to be an allowable expense for tax purposes. This is a massive give away bythe tax man and one that should not be ignored. You can stand to pay just the capital on your loan, not the interest, just think of how much you would save on your home mortgage.
4. Commercial mortgages may be cheaper than your existing business borrowing: Commercial mortgages are secured on property, meaning the lender has the security of the property should you default on your loan. This therefore means that commercial mortgages are cheaper than other forms of borrowing such as unsecured bank loans, overdrafts or company credit cards.
With this in mind, it’s not just to buy property that commercial mortgages are used for; they can be the most cost effective option for debt consolidation to reign in high interest rates on these debts.
5. Commercial mortgages tend to be structured differently to residential mortgages: Though there are some key similarities between residential and commercial mortgages, the loans are actually created in a different way. For example, you can rarely take a commercial loan on a purely ‘interest only’ basis. It represents too high a risk for a bank. Whilst a lender, sympathetic to you in financially difficult times, may allow you to make interest only payments for a while, the loan will normally have to be repaid on a capital and interest basis eventually.
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.
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