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Commercial mortgages: Advantages and disadvantages

What are the advantages and disadvantages of a commercial mortgage? We can break them down for you and give you the right advice

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 12th November 2019 *

We hear from lots of customers who are in the market for a commercial mortgage and want to know what the advantages of these products are compared to other forms of borrowing. This guide weighs up the pros and cons of business mortgages and highlights the key differences between commercial and residential mortgages.

You’ll find the following topics covered below…

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Advantages and disadvantages of commercial mortgages

To work out what the main advantages of a business mortgage are for you and your firm, you should identify all of the possible alternatives and weigh up the pros and cons of every option. The first thing you should ask yourself is what you need a mortgage for.

Some types of commercial mortgages, known as owner-occupier mortgages, as for securing a business premises for your firm, and the alternative to this would be renting.

You should also consider how much capital you need to borrow to buy the premises you’ve got your sights set on. If you already have significant capital to put down, a business loan could help you complete the purchase without taking on a full mortgage.

Business loans can also provide an alternative to borrowers who want to remortgage a commercial property to borrow more, but they come with their own pros and cons.

Owner-occupier mortgages vs renting a business premises

Here, we’ll outline the advantages and disadvantages of an owner-occupier mortgage for a business, weighed up against the pros and cons of renting a commercial property.

Advantages of an owner-occupier commercial mortgage

The main benefits they have over renting are as follows…

  • Commercial mortgage repayments are often the same as rental payments for the same business property, or at least similar to them

  • There is no risk of unexpected rent increases

  • You can sublet any extra space in the property to generate rental income (lender permission should be sought first)

  • You have control over alterations to the building and can extend the premises if your business grows, avoiding potential relocation costs

  • Interest payments on commercial mortgages are tax-deductible

  • If the property gains value, your firm’s capital will increase

Disadvantages of an owner-occupier commercial mortgage

Potential drawbacks of taking out an owner-occupier mortgage rather than renting are as follows…

  • A substantial deposit is needed for a commercial mortgage: usually 25-40%

  • It may be more difficult to relocate as selling a business premises can be more complicated than negotiating an end to a rental agreement

  • There may be extra expenses to foot such as repairs to the building, security, insurance costs, fixtures and fittings

  • Your capital could take a hit if the value of the property declines

If you’re concerned that any of the above disadvantages might apply to your business, get in touch and the advisors we work will help you assess how much risk is involved. They can connect you with the right commercial mortgage lender or suggest potential alternatives.

Business loans versus commercial mortgages

Business loans can serve as a viable alternative to commercial mortgages, under specific circumstances… read on to find out exactly what they are.

Should I get a commercial mortgage or a business loan?

A business loan might be more cost-effective option than a commercial mortgage if you only need to borrow a certain amount to buy a premises (perhaps you have a large chunk of capital to put towards the purchase or are buying at a knock-down price).

In a nutshell, a business loan might be worth considering if…

  • The amount you wish to borrow is lower than £25,000 - it is generally considered uneconomical to borrow less than £50,000 on a commercial mortgage due to the legal and admin costs involved, and some lenders have minimum loan requirements

  • You want to borrow on an unsecured basis - commercial mortgages always require some kind of security, but business loans are a form of unsecured lending

  • If you want to repay the debt over the course of less than three years and have an exit strategy in place to do so, a bridging loan might be a suitable third option. You can read more about bridging loans for commercial purposes in our guide to commercial bridging finance.

Are commercial mortgages more expensive than business loans?

Not necessarily. Secured business loans do exist and it’s possible to borrow much more than £25,000 this way but there's a caveat.

They're not usually considered a viable alternative to commercial mortgages as interest rates would likely be higher if you were taking one out to buy a property.

Commercial remortgage vs business loan

If you’re considering refinancing your commercial mortgage so you can borrow more, it may be worth considering a business loan as an alternative, providing the amount you need is £25,000 or lower and you have no qualms about unsecured borrowing.

Which of these two options you choose comes down to whether you would qualify for more favourable interest rates from a remortgage lender or a business loan provider.

As both of these forms of commercial borrowing are handled on a bespoke basis, there’s no hard and fast rule on which rates you will qualify for. The lender will base the deal on the level of risk after looking into your business’s profitability, credit history and trading history, among other factors. It may be the case that some providers will offer you more favourable rates for a business loan, while others will offer you a table-topping remortgage deal.

This is why you should seek advice for a broker who has access to the entire market before choosing between a remortgage or a business loan for the purpose of additional borrowing. Make an enquiry and the advisors we work with will track down all of the best deals you qualify for and introduce you to the lenders offering them.

Small business loans vs mortgages

Customers often ask us whether a commercial loan or refinancing a commercial mortgage is the best option for a small business looking to borrow funds.

In truth, commercial lenders generally treat smaller businesses in the same way as larger operations, offering them the same products, rates and loan to value ratios (LTV), assuming they pass the eligibility and affordability checks - so all of the information in the section above applies to small businesses and small business owners.

Commercial mortgages vs buy to let

Customers who have aspirations to become professional landlords often ask us whether they need a commercial mortgage or a residential buy to let mortgage, and the answer depends on who you plan to let the premises to. If your aim is to rent the property to residential tenants, you will need a standard buy to let mortgage - but if you’re planning to let the building for business purposes, you will need a commercial investment mortgage.

You can read more about residential buy to let mortgages in our buy-to-let mortgages guide.

Commercial mortgage rates vs residential mortgage rates

Commercial mortgage rates are typically higher than residential- but that’s not the only difference.

Commercial mortgage rates are determined on a case-by-case basis and are tailored to the individual or business that is applying for a mortgage, determined by the level of risk. Residential lenders, however, decide what their rates are in advance and will decide whether to offer their most favourable deals after assessing a borrower’s profile.

Why are commercial mortgage rates higher than residential?

To put it simply, because commercial mortgages are generally seen as higher risk.

The interest rate you will end up with will be determined by just how risky the lender thinks the investment is, and they will calculate this based on the following factors…

  • The loan to value ratio: Typical deposit requirements range between 25% and 40% in the commercial sector, but generally speaking, the more you can put down, the lower the level of risk as lenders prefer lower LTV deals.

  • Credit history: The best rates may be harder to come by if you or your business have bad credit as some lenders prefer borrowers to have no credit issues on their file.

  • Trading history: Some lenders will consider the deal risky if your business has no (or little) trading history as there are commercial mortgage providers who prefer borrowers with a strong track record in the industry in question. There are, however, specialist providers who cater for new investors and start-ups.

  • Profitability: Commercial lenders determine affordability by assessing a business’s operating performance, i.e. looking at their earnings before interest, tax, depreciation and amortisation (EBITDA). There’s no hard and fast rule about how much you can borrow based on these figures, but the more confident the lender is that the mortgage is serviceable, the more likely they are to offer favourable rates.

Speak to a commercial broker about the pros and cons of business mortgages

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry online.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 12th November 2019
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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