Commercial Mortgages: Advantages and Disadvantages

Whether you're considering purchasing property or real estate for your business, one way of overcoming this obstacle is by applying for a commercial mortgage.

Commercial mortgages are classed as a secured, long-term form of lending, and can be a great way of raising and borrowing capital in large amounts for a variety of property-related purposes.

Yet in order to make an informed decision and discern whether your business stands to benefit, understanding every aspect of this product is essential. As such, here are the advantages and disadvantages of mortgage loans for businesses you need to know about.

Advantages of commercial mortgages

Commercial mortgages are a very common form of long-term lending for businesses. There are two types of commercial mortgage:

• Owner-occupied mortgages - Buying a property for your own business use.
• Commercial investment mortgage - Buying a commercial property to let out to other businesses. 

With that in mind, let's dive into some of the biggest advantages of taking out a commercial mortgage for your business.

Access to a large sum of funds

Of course, a commercial mortgage is typically a large loan secured against the value of the property. This means you can often borrow a high figure and spread out the expense of the purchase over a period of up to 20 years.

Funding typically starts from £50,000, the amount of capital you could borrow is based upon the purpose behind the agreement, such as a property purchase, premises refurbishment or a partner buyout. 

Favourable interest rates

Since a commercial mortgage is usually secured against either the property you’re purchasing or one already in your possession, it encourages lenders to offer you a favourable interest rate (depending on your current financial situation).

Plus, it’s also worth noting that if you possess the necessary capital, you can choose to pay off the mortgage product early, but there will often be a fee (redemption penalty) for doing this.

Investing in an asset

You may be trying to decide between buying or renting a property for your business. Purchasing a property is obviously a big investment, but it's hugely beneficial for your business to own a property. 

Opportunities for redevelopment

When you own a property, you obviously have more control over it. Whether that's a simple aesthetic decision or full redevelopment and change of use, you can make decisions that work for your business in a space that you own without worrying about landlords. 

Income opportunities

Not only is owning a property a great investment for your own business, but it can be an ideal way to create a new income stream. For example, you can rent out part of your property to another business to help pay toward your mortgage payments and increase your networking opportunities.

Disadvantages of commercial mortgages

So, it's clear that taking out a commercial mortgage can work well for many different types of businesses. From buying care homes to investing in student accommodation, whatever type of commercial mortgage you are applying for, it's important to take the time to understand the downsides of this type of loan. Let's dive in.

Significant deposit required

Firstly, when applying for a Commercial Mortgage, you’re required to place a portion of your own equity in the agreement. So depending on the purpose, this starts from 20% of either the total purchase price or the full cost of the refurbishment.

However, if you’re able to offer up to 40%, it can significantly reduce the amount of capital your business needs to borrow and may earn you a more favourable interest rate too. Therefore, providing equity could, in fact, be seen as being both an advantage and a disadvantage, depending on your perspective.

Tax implications

When it comes to selling your commercial property, you will need to pay capital gains tax on the profits made from the sale. There may be other tax implications to consider, so keep this in mind.

Long-term repayments

In addition, Commercial Mortgages use a Fixed Monthly Repayment Scheme that requires you to pay an agreed amount of capital back to the lender every month. Although this could enable you to stay in control of your budget, it may become an issue if you’re unable to keep up with the repayments at any point.

Should this occur, the asset that’s being used as collateral could be at risk of repossessed by the lender and, if this was to happen, you would also lose all the capital you’ve already paid into the agreement. Plus, it’s also worth noting that your monthly repayment can vary depending on whether you’ve chosen to use a Fixed Rate or Variable Rate Mortgage.

So, whilst using a Fixed Rate product will protect you in the event of a market interest rates rise, you may lose out if they decrease. But on the other hand, Variable Rates could enable you to save if market interest rates drop, yet it may cause you to pay more should they rise instead.

Need help sourcing a suitable Commercial Mortgage for your business?

If you’re looking to raise money in order to support your goals, choosing a suitable finance solution can be quite an intimidating process. But if your business is in need of a lump sum in order to support a large expense, applying for a Commercial Mortgage could be the way forward.

However, with the Alternative Finance Industry continuing to grow and introduce a new generation of lenders, sourcing a suitable mortgage agreement that also offers you a competitive rate isn’t as simple as it may sound. But rather than waste precious time and risk paying out more than you have to in the long run, speaking with a qualified business finance professional could prove invaluable.

At Rangewell, we’re a commercial loan specialist. Our services are free to use and we’ll also guide you through the application process.

So if you’re looking to gain access to a large lump sum, apply for a Commercial Mortgage today or find out more with Rangewell. Plus, we can also find funding for property selling agents, property surveyors and valuers, and anyone else in the property sector.