If you run a business in London, you’re sure to know the value of owning a property. This is a great asset that helps in retaining expenses such as rent and moreover finding a new premises when your lease agreement expires. But purchasing a property in a city like London isn’t ‘a walk in the park’. That is why many business owners look for an easy way to handle the purchase by going in for a commercial mortgage. After all paying off a mortgage opposed to paying a rent is a definite advantage since you will be owning the property once your mortgage is done.

So what exactly are commercial mortgages and what can they do for you to enhance your business venture? This article looks at the advantages a business can look forward to by obtaining a commercial mortgage. Keep reading to find out how.

What are commercial mortgages?

Mortgages are meant to help with only one thing, and that is assisting with the purchase of property you want to live in. Commercial mortgages also known as business mortgages, in the UK are pretty much the same, but for a different purpose. As the term implies, commercial mortgages are used by commercial enterprises or business people looking to purchase land or property to be utilised for commercial activity.

While the terms and conditions of commercial mortgages are similar to residential mortgages, some mortgage lender rates in London could be higher than what residential mortgages have. The approval of a commercial mortgage depends on some factors such as, the total loan amount, the lender and their rate structure, your credit history and the financial strength of your company. Commercial mortgage approvals undergo more scrutiny to ensure all the furnished details are accurate and true. Another factor that differentiates residential mortgages from Commercial mortgages in the UK is the amount required as a deposit. These business mortgages usually require a deposit ranging between 25% – 40%. If you are able to come up with a higher deposit, you can expect more attractive monthly repayment rates.

Do commercial mortgages have fixed or variable rates?

Yes, commercial mortgages in the UK do have both options of fixed and variable rates. To understand if you require a fixed or variable rate mortgage, you should as a first step evaluate your income, business investments, stakeholder options and other business-related commitments.

As in a residential mortgage, the bank and the lender will check your ability to carry out the monthly repayments. The usual term or period of payback for fixed mortgages is from 2 years going up to 5 years in the UK.

In some business ventures the financial environment can be volatile with market situations, product prices and operational costs changing rapidly. If this is your business type which is periodically affected by external influences, be mindful that fixed rate payments provide lesser flexibility where repayment is concerned. In that case, you may consider obtaining a variable rate mortgage that has fluctuating interest rates to allow better business flexibility.

Variable mortgage rates fluctuate according to the rates specified by the bank. The base rate is set by the Bank of England. Having a variable mortgage may help especially during difficult financial times when it is a hassle to carry on with a fixed rate mortgage repayment. With a variable mortgage, in the event of the base rate dropping, you will benefit by way of paying a lesser interest rate. This will reflect as a saving to your business enterprise.

Business mortgage pros and cons

Like all mortgages, Commercial or Business mortgages in London and the UK have their advantages and disadvantages. Let’s look at some of the advantages.

Probably the most obvious advantage is of course you owning your property. Being an owner of a property adds value to business assets and can be taken as long-term investments. Another plus is, a long-term mortgage taken on a commercial mortgage allows you to focus on your business activities without worrying about settling your mortgage quickly. This is a definite advantage to a business where capital expenditure can be built up without having immediate heavy cash outflows.

Lastly a definite plus is the flexibility commercial mortgages offer. You may have to check with your lender what the conditions or penalties exist for early mortgage settlement. In the event of not being able to settle the mortgage early, speak to a mortgage broker for advice on how to lease or rent the premises in order to pay off the monthly instalments of the mortgage. This is also a possibility with commercial mortgages.

As for disadvantages, it must be kept in mind that business mortgages do take a while to be approved. This is mainly because commercial mortgages need quite a bit of document and fact checking. And yes, this does take a while. You may have to wait out that period of time before being told if your mortgage is approved or not.

The deposit required is also larger than in residential mortgages. A lender may ask for a 30% deposit. And this can be a significant cost to incur before even being able to generate income from the property. However, if you do pay a deposit of 30% or more, you can pay a lesser monthly instalment.

If you decide to go with a variable rate, you should be aware that in the event of bank rates increasing, the chances of your instalment payments increasing is very real. While dropping bank rates is a saving on your mortgage, a rise in bank rates can be detrimental to the company’s finances.

Conclusion

Commercial or business mortgages are a popular and profitable way to own a property. Much like residential mortgages, commercial mortgages pave the way for owners to expand their business by purchasing a property. A definite asset, the purchase of a property through a mortgage has it’s advantages and disadvantages. By deciding on which type of rate to go with, a business owner stands to gain by obtaining a commercial mortgage.

If you are intent on purchasing a property in London or anywhere in the UK, speak to a qualified and experienced broker first. At BVS, our efficient and experienced mortgage advisers will be happy to provide insight as to how you can gain the best out of a commercial mortgage.

As we see in this article, the advantages outweigh the disadvantages. Turn your business options into potential profitability by considering a commercial mortgage.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.   COMMERCIAL MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

* Approved by The Openwork Partnership on 26th July 2023.