What is the Difference Between Renting Business Premises and an Owner-Occupier Mortgage?
There are several pros and cons between renting a commercial property for your business and buying a property through an owner-occupier mortgage.
Pros of Choosing an Owner-Occupier Business Mortgage:
- Your monthly payments on the mortgage are likely to be very similar to the monthly rental payments you would expect to pay.
- There is stability in budgeting for monthly repayments, without accounting for potential rent rises.
- The business may sublet additional space to generate rent to contribute to the mortgage repayments, subject to lender permission.
- Companies have control over how they use the space, including making changes and extensions to allow for business growth as an alternative to relocating.
- The interest payments paid on the mortgage is tax-deductible.
- As the existing property grows in value, so too does your business equity and capital balance.
Cons of Business Mortgages vs Renting a Property:
- You will need somewhere between 25% to 40% deposit.
- Relocations to commercial premises can be more complicated since you'll need to sell your business property, which is likely to take much longer than ending a rental agreement.
- The business will need to cover all the building repairs and maintenance costs.
- If the property market dips, your building may decrease in value.
The best option when trying to weigh up the pros and cons of any business decision is to consult mortgage brokers as experts who offer independent advice.
If you are deciding between renting or buying your own business premises for your business to trade from, give the revolution team a call on 0330 304 3040.
Is a Business Loan Better than a Commercial Mortgage?
Dependent on your circumstances and what you wish to borrow, you might decide on a business loan as an alternative to most commercial mortgages.
Business loans are usually cost-effective if you only need to borrow a proportion of the purchase cost. Examples where this might be the right choice include:
- You need to borrow under £25,000. Generally, if you need less than £50,000, a business mortgage isn't the most viable option given the minimum lending caps and the costs of taking out a mortgage.
- You are happy to borrow through an unsecured loan. Commercial mortgages require security in the form of equity or another asset, whereas business loans do not.
- You expect a regular mortgage payment solution that can help you get back the loan in three years or less. In this case, a bridging loan might be a good option provided you have a repayment vehicle as a business asset in place as an exit strategy.
Which is More Expensive: Commercial Mortgage or an Unsecured Business Loan?
It really depends on how much you want to borrow, and how long for.
Unsecured business loans are another option, whereby you use an asset or property as security, and therefore can borrow over and above the usual £25,000 maximum.
However, business loans are generally not cheaper than a commercial mortgage for higher amounts of borrowing, as the interest rates of often steeper.
Pros and Cons of Re-mortgaging or Taking out a Commercial Loan
Another scenario exists where you have an existing commercial mortgage, and want to raise more capital. You could remortgage the existing mortgage, or take out a business loan if you're happy with unsecured borrowing rates, and need £25,000 or less.
Each option depends on the timescales and amount you need to borrow, and a professional commercial lending broker can help you identify the most cost-effective option. A commercial mortgage offers flexibility higher than other forms of mortgages as well.
When looking at the advantages and disadvantages, lenders will look at several factors when deciding whether to accept an application, such as:
- Business profits
- Credit rating
- Trading history
This applies to any form of commercial lending, so it is always wise to seek independent advice before committing to any form of borrowing.
Business Mortgages Compared to Small Commercial Loans
The Revolution team often receives refinancing enquiries, from businesses trying to compare a commercial remortgage with a loan, for a small business.
In most cases, a lender will assess a small business in much the same way as a more significant organisation, with similar LTV caps, rates and terms.
Is a Buy to Let or a Commercial Mortgage Best for My Business?
Professional landlords and investors need to choose between a residential mortgage and commercial mortgages - and the deciding factor is who your tenants will be.
If you expect to let your property to residential tenants, then a buy to let mortgage is the right option.
However, if the premises will be leased to businesses, then a commercial mortgage is the correct choice.
How do Interest Rates Compare Between Commercial and Residential Mortgages?
Typically, the rates charged on a commercial mortgage will be higher than a residential one.
However, these are very different products, with commercial finance lending a bespoke product tailored to the organisation, and with a different risk assessment process.
In residential mortgages, lenders usually have fixed published interest rates, and make an offer depending on the risk profile of the applicant, contrary to a variable rate mortgage.
Why are Commercial Mortgages more Expensive than for Residential Applicants?
In short, commercial lending is more expensive because it carries a higher risk profile.
The interest rate offered depends on the risk perceived by the lender, which they calculate based on the below criteria:
- What LTV ratio you are borrowing at. Most commercial lenders require a deposit of 25-40%, and the higher the deposit and lower the Loan to Value ratio, the better a rate the lender can offer.
- Your business credit history. Lenders will consider your credit file, as well as those of the primary owners or directors of the company.
- Trading experience of the organisation. The longer you have been trading, and the more extensive a track record you can demonstrate, the less risky the application.
- How profitable the business is. Lenders will look at your business profits in detail, to assess whether you can afford to keep up with the commercial mortgage payments.
Stuck in deciding which commercial lending product is the most viable for your business? Have complex borrowing requirements that fall outside of the scope of your usual high street bank?
