Commercial Mortgages: Advantages and Disadvantages
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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-reated 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 Commercial Mortgages you need to know about.
One of the biggest advantages of using a Commercial Mortgage is that it's a long-term finance agreement which enables you to spread out large expenses over a period of up to 20 years, sparing you the need to remove large quantities of cash from your savings. Plus, although 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. As such, there’s a limit to how much you could borrow other than how much much the lender is willing or able to provide.
In addition, because Mthe product 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 to do this (redemption penalty). Therefore, choosing to explore the advantages of using a Commercial Mortgage could be a great way of supporting and spreading out large expenses, allowing you to focus on other aspects of your business in the meantime.
However, although it can be prove to be a very useful tool for your business, using a Commercial Mortgage also has its disadvantages as well. 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.
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 an Access to Finance specialist and have mapped over 400 lenders to offer you a comprehensive overview of more than 23,000 business finance products. 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.