Take out a commercial property mortgage or rent? - Business - Guides - Moneyfacts


Take out a commercial property mortgage or rent?

Take out a commercial property mortgage or rent?

Category: Business

Updated: 03/10/2016
First Published: 29/09/2016

Buying a commercial property is a big step for your business. To do this, it's likely you'll need a commercial mortgage to finance the purchase. This has a number of advantages and disadvantages when compared with renting.

Commercial property mortgages allow you to eventually own your business premises as an asset (as opposed to paying rent and never seeing that money again). However, you will take on some extra risks by opting to own the property rather than rent.

To help you judge for yourself, we've put together a table illustrating the merits and drawbacks of both renting and getting a business mortgage.

Commercial property: buy (with a mortgage) or rent?

Buy? Rent?
Some lenders offer fixed rate commercial property mortgages, offering you security for a set period.
You don't need to worry about your landlord making big rent increases.
If the property rises in value, your business' asset value increases.
You may be able to sub-let your commercial property to other businesses and generate a rental income. Make sure you check that you're allowed to do this with your mortgage lender first!
The interest portion of commercial mortgage repayments is tax-deductible.

Easier to re-locate if your business needs to expand.
Your business doesn't have to tie up a large sum of money in the property as a deposit.
Your landlord will be responsible for maintenance of the property.
You are not exposed to fluctuations in property prices.

If you opt for a variable rate commercial property mortgage, your payments will go up if interest rates rise.
If your property goes down in value, your business' asset value decreases.
As you'll own the premises, you'll be responsible for maintenance.
For a commercial property, you will probably need to be able to lay down a deposit in the region of 20 to 30%.
Owning the property can make it harder to move if your business needs to.
Rents can be put up unexpectedly by large amounts, which may put your cashflow under immense pressure.
Your business is paying money to a landlord – you won't own the property.
Your business wouldn't benefit from any increases in commercial property prices.

If you're satisfied that a commercial property mortgage is right for your business, you will need to consider a few things before jumping in…

Compare commercial mortgages

The bank that provides you with business banking services may also be able to offer you a commercial mortgage. You shouldn't dismiss this offer, but it's also important to compare commercial mortgages with other lenders to make sure you're getting the best deal.

Set the mortgage payment at a comfortable level

Decide on the maximum amount per month that your business could commit to paying for the commercial property mortgage.

Be sure to set this maximum at a level you can easily afford. Remember that if you miss repayments, your business' premises could be at risk of repossession.

Many commercial mortgage lenders offer a fixed rate or capped rate option, giving your business some payment security. A capped rate gives you a payment ceiling if rates go up, but also lets you take advantage of rates when they're low.

While variable rates may be low at the moment, remember that rates may go up in the long term, meaning you could be paying significantly more in the future.

Deposits on commercial property mortgages can be high

Commercial property mortgages generally require you to put up a sizeable deposit.

There are several factors that will influence the minimum amount of deposit you will need to provide. These include:

  • The commercial property you are looking to buy (a petrol station may require a larger deposit than a farm, for instance).
  • The amount the lender thinks that you can afford. If the lender thinks you can't afford the commercial mortgage you are asking for, they may reduce the amount they are willing to lend your business. In effect, this will mean that you will need to provide a larger deposit.

The deposit can range from 0% to 50%, and this can vary between mortgage lenders.

Don't underestimate the value of a business mortgage broker

Business mortgage brokers will have good working relationships with many lenders, and will know their particular foibles with regards to criteria, costs and service. They can save you a lot of time, and potentially a lot of money, too.

Make sure you look for an independent business mortgage broker – preferably one that's a member of the National Association of Commercial Finance Brokers (NACFB) – this way you can ensure that you are getting the best advice for you and your business.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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