As the UK property market has been recovering from the pandemic in 2020, that has meant that many more investors and property developers are now starting to look at commercial property again.
Due to the nature of the economic shut down, it meant that many businesses needed to re-think what they used their physical space for. Commercial space for offices and other businesses where people were able to work from home have now fundamentally changed, whilst internet based businesses, for example, have had to commit to much more space to be able to store their stock and goods.
It’s also meant that many UK high streets have changed drastically over this period of time too, with many shops either having shut or changed hands, which has meant there’s been a lot of activity in the market.
Due to the success of the property market in the UK, including commercial property, this has meant that many more people are interested in a commercial mortgage or commercial mortgages. This has subsequently meant that many lenders are expanding their available products, and we’ve seen a lot more enquiries about these types of commercial mortgage, and commercial mortgages more generally.
To give you a better idea of what a commercial mortgage entails, we’ve set out some advantages and disadvantages of commecial mortgages.
Why choose a commercial mortgage?
A commercial mortgage is a popular option for when you’re looking to buy premises for your business because, ultimately, it means you can repay the principle loan over a much longer period of that than if you got, for example, a business loan or other type of borrowing or finance.
Having said that, you can use a commercial mortgage for other things too, such as developing the property, changing its use, extending the property, converting a property or even for residential projects too, providing you’re applying for the mortgage as a commercial entity.
It means that, although it may appear to be rigid, it’s a fairly flexible option for your business as a whole and can be used for multiple purposes whilst still being a relatively fixed and organised form of lending that is for the long term.
To give you a better idea of what some of the advantages are, vs the disadvantages, we’re going to run through the main ones here.
Advantages of commercial mortgages
There are many advantages to a commercial mortgage, however, here are some of the main ones.
Commercial mortgages are flexible
As we’ve mentioned, you don’t have to use a commercial mortgage specifically just to buy commercial property, you can use it for a range of things, including developing an existing property, developing a brand new property, extending your business premises, residential property developments (providing you’re applying as a commercial entity), commercial developments, and to buy land.
With that in mind, many of our clients assume that a commercial mortgage is quite rigid and can only be used for very specific purposes but, ultimately, as long as there is a central asset as part of the lending that can be used as security, and you have a good business plan and exit strategy, then realistically it has a wide variety of uses.
A business mortgage has lower interest
A commercial mortgage will typically be significantly less in interest payments than shorter term lending, because you’re borrowing the money over a much longer period.
Of course, if you only need the borrowing over a specifically shorter period and you have a large deposit, then a commercial mortgage, and longer term borrowing, may not be for you. Having said that, when it comes to buying commercial property, it’s usually an expensive exercise and, in that context, it’s usually considered a better business practice to spread the payments over a longer period and pay less in interest.
More business revenue streams
If you have more space than you need then there’s the potential to rent that space out to create more income for your business. This can either be commercial space or residential space, depending on the building itself.
Shops, for example, often have residential units above them, and this can mean that over the long term you’re giving yourself much more opportunity to earn revenue.
Further to that, once you own the building, you’ll also be accruing capital as the value of the property increases over time. This is never guaranteed, however, the vast majority of properties in the UK will increase somewhat significantly in value over a number of years.
When you own your own premises or building, and have it on a commercial mortgage, the plus is that you know exactly what your monthly payments will be for the foreseeable future, rather than being concerned about the potential for rent rises or whether your tenancy may be ended prematurely.
Secondly, you’re avoiding what’s known as ’empty money’, in that your rental payments aren’t going to another business, they’re going into property equity whilst the property itself increases in value, meaning that the ’empty’ rent payments are now effectively accruing interest and servicing another investment on behalf of your business.
If you’re thinking of applying for a commercial mortgage, it may be the case that it’s not the best product available for you, and that something else may be more suitable, for example, a loan or other finance.
Here is a list of the main negatives to be aware of.
Deposits to buy
When you’re looking to buy a commercial property, you’re likely going to need to find quite a sizeable deposit to get approved for it, as commercial property is considered riskier than residential as it’s for a more niche use.
Depending on what you want the mortgage for, the type of building, etc, you’re likely to need between 25% and 40% to get approved, and this can be a sizeable amount of capital to get together, especially if you’re looking to buy a building that’s got a high entry price.
As opposed to other types of finance or loan, such as a bridging loan, you may need to find a way to get together a decent deposit before you can think about applying for this type of mortgage, however, if you’re unsure you should get in touch with us.
The property is harder to sell
Commercial property is, generally speaking, more difficult to sell than residential property, and this can mean that if you need to vacate the premises or try and sell it quickly this can become complicated.
This is especially true if you use the building for quite niche uses. For example, if you’re a chemical manufacturer who uses your building in a specialist way and it’s been developed to accommodate this, then that’s going to be much more difficult than selling, say, a shop unit that could theoretically be used for anything.
In comparison, if you’re a tenant in commercial property, it’s much easier to be able to give notice and find different premises if you need to. Of course, there is still the option to change the use of the property and re-mortgage it and convert it to something else or rent it to another business.
As the owner of a commercial property, all the security, upkeep and maintenance costs are yours to pay for, rather than as a tenant where the landlord would cover the majority of these costs.
Over the course of time, these costs can start to add up, however, this is a similar concept to if you own your own home residentially, and over the course of the ownership this tends to balance itself out with the amount that your property increases in value.
Changing mortgage rates
As with any type of long term lending or finance, if your loan isn’t kept at a fixed rate then your repayments can be affected by fluctuating interest rates.
We’re currently at historical lows for the base rate of interest from the Bank of England, however, things can change, and if interest rates suddenly rise you could be vulnerable to quickly rising repayments that you’re committed to for years.
Again, it’s the same as with your residential mortgage, and of course if interest rates quickly change then your landlord could simply choose to increase your rent payments, however, at that point you’re free to look for somewhere cheaper, and landlords have to respond to the market demand, meaning they may not be able to replace you if they raise your rent by too much, so there’s a risk involved.
Commercial property prices
Whilst, in the scheme of things, it’s likely that you’ll see the value of your commercial property rise if you choose to buy it, there’s always a risk that it could drop too, as with any open market.
There’s also risks that external factors could affect the value of your investment too. If, for example, you take out a mortgage on a commercial unit where an off-licence or other type of business opens next door, or a bar, for example, this may drop the value. Again, if you use your property for quite niche purposes this may also exclude some uses and make it less valuable.
Are commercial mortgages more expensive?
It very much depends on the context and what you need the finance for. There are absolutely likely to be some situations where a business loan or shorter term finance may be more appropriate.
If, for example, you have quite a lot of capital to put towards a deposit, making the loan smaller, or if you don’t need to borrow a particularly large amount, then it’s more sensible to get a business loan.
Whether a mortgage for commercial property is more expensive is relative. If you don’t need to borrow much, then yes because you’ll pay the principle sum over a longer period, however, using a loan as an alternative to a mortgage when you need to borrow a significant amount is usually cheaper because the rate of interest is much closer to the bank of England base rate.
Speak to our commercial mortgage brokers
We have a highly experienced team of mortgage brokers who can advise you through the whole process, and because we offer a wide range of financial products, if it turns out that a mortgage isn’t the best product for your situation, we’ll tell you.
We work with a wide variety of lenders, and will always find you the best rates and terms available for you, so why not pick up the phone and speak to somebody today?