If you run a small or medium-sized business, buying property can seem like an attractive option. It’s also a wise investment to make because it can provide significant returns. With prices ranging from just a few thousand pounds to several hundred thousand, finding the right funding is important. For the majority of people, a commercial mortgage will be the obvious answer.
What is a Commercial Mortgage?
A business loan is often the first choice for anyone wanting to invest in business property. However, it’s not always best because there are certain limitations. Most importantly, a business loan tends to be limited to amounts less than £25,000. A commercial mortgage is the other option. It can be used for buying business premises, securing land development ventures, developing an owner-occupied business or for adding to a buy-to-let portfolio. It is usually a long-term loan, for periods of up to 40 years and will be for up to 70% of the property’s value.
There are basically two types of commercial mortgage. An owner-occupied mortgage is used to buy property that will be used as trading premises for your own business. A commercial investment mortgage is used for property you might be planning to let out.
The Benefits of a Commercial Mortgage
There are several benefits to choosing this type of mortgage if you want to buy commercial property.
- It can be cheaper than renting
- Releases capital that can be used for investment or growth
- Allows you to consolidate business debts
- Can be used to buy new equipment
- Allows sub-letting or leasing for extra income
- Able to expand trading
Applying for a Commercial Mortgage – What You Need to Know
There are a large number of lenders offering commercial mortgages. Finding the right one is vital. It can be quite challenging because rates, requirements, terms and conditions vary considerably. Some of the factors you need to bear in mind include the following.
Term of the mortgage – the length of the loan can vary from 5 to 50 years and during that time, repayments can be a big financial commitment.
Repayment – the interest rate for a commercial mortgage tends to be higher than a residential mortgage. This is because this type of lending is considered to be a higher risk. You’ll also be required to provide a higher deposit, generally a minimum of 30%.
Credit history – as with other types of loan, your credit history is going to play a big part in the deal and whether your application is accepted. There’s nothing to stop you applying, however, even if you have a bad credit history. You could still be accepted, however, it’s very likely the interest rate will be much higher to make up for the extra risk. As well as your credit history, a lender is also going to want to know more about your company, including a business plan and projections.
What is the property going to be used for? – this is going to impact on the amount of money you can borrow as well as the interest rate offered.
Stamp duty – stamp duty has to be paid on commercial property over the value of £150,000. It has to be paid whether the property is freehold or leasehold. If the freehold property you’re buying is between £150,001 and £250,000 the rate paid is 2% of the property value. For property above £250,000 it is 5%. For a leasehold property the amount is 1% and 2%.
Other fees – there are several fees you’ll have to pay. An arrangement fee of between 1% and 2% is added to the loan after it has been approved, although you may be required to pay it in advance. Valuation fees are payable to the lender after an initial offer has been accepted. Prices start at £500. Both your own and the lenders legal fees also have to be paid.
Alternative Funding Options
If you think a commercial mortgage is not right for you there are a few other avenues you can explore. These include:
Bridging loan – can be used to complete the purchase of a property if you have another property to sell
Short-term loan – no long-term commitment is made
Personal loan – this is an option if you want to borrow between £1,000 and £25,000
Now you know all the basics of financing the purchase of a property you’re all set to start looking around.