If you are a business looking to buy your own premises or you are an investor looking to add commercial property to your portfolio, you are likely to need a commercial mortgage. Business loans and commercial mortgages are designed to help you raise the capital you need to purchase offices, shops, warehouses, factories or other commercial premises.
Whilst there are some similarities between commercial and residential mortgages – a lender will generally advance a sum of money secured against the property you buy – there are some major differences. Our guide highlights five things everyone should know about commercial mortgages.
1. You will generally need a higher deposit than for a residential purchase – If you are buying a residential property, you will typically have to find a deposit of at least 10-15 per cent of the purchase price. Some lenders will require higher deposits, particularly to secure the very best interest rates.
However, with a commercial mortgage it is not unusual for you to have to put down between 30 and 40 per cent of the purchase price. Buying commercial property may therefore require you to commit a significant amount of your own capital.
2. You may need to provide a personal guarantee – Commercial mortgages are available to individuals, partnerships and to companies. If you want to borrow in the name of your company (for example to buy business premises) it is likely that the directors of the company will have to provide ‘personal guarantees’ to a lender. This means that directors will be required to step in and make payments to the commercial mortgage should the business fail to keep up the payments.
3. Mortgage payments are generally tax deductible – When you take out a commercial mortgage, HM Revenue and Customs (HMRC) generally consider the interest payments on the loan to be an allowable expense for tax purposes. So, your business can claim the cost of interest payments on a commercial mortgage as a tax deduction when preparing the company accounts or your Self Assessment tax return.
4. Commercial mortgages may be cheaper than your existing business borrowing – Many companies use unsecured borrowing such as a bank loan or credit cards to fund some elements of the business. One advantage of a commercial mortgage is that the interest rates charged can often be lower than other forms of credit as the lender has the security of the property as collateral.
So, many companies use commercial mortgages not only to buy premises, but also to consolidate other short term debts that are on high interest rates.
5. Commercial mortgages may be structured differently to residential mortgages – Whilst there are similarities between residential and commercial mortgages, loans are often structured in a slightly different way. For example, it is rare that you can take a commercial loan on a pure ‘interest only’ basis. Whilst a lender may allow you to make interest only payments for a year or two, the loan will generally have to be repaid on a capital and interest basis thereafter.
In addition, some commercial mortgages are set up on a ‘quarterly payment’ basis where interest payments are made every three months rather than on a monthly basis.