cfnuk No Comments

Commercial Mortgages: The Advantages & Disadvantages

Introduction

Commercial Mortgages

Commercial mortgages are powerful financial tools that provide businesses with the means to acquire or refinance properties used for commercial purposes.

Understanding the concept of commercial mortgages, as well as their advantages and disadvantages, is crucial for entrepreneurs looking to invest in real estate or expand their existing operations.

In this post, we will delve into what commercial mortgages are, explore their advantages and discuss the potential drawbacks associated with these commercial loans.

In this post we cover the following topics:


Definition of Commercial Mortgages

Commercial mortgages are loans specifically designed to finance properties used for business purposes, such as office buildings, retail spaces, industrial facilities, or multi-unit apartment buildings. These loans differ from residential mortgages in terms of loan amounts, terms, underwriting criteria, and repayment structures.


Key Features of Commercial Mortgages

Loan Amounts

UK Commercial mortgages typically involve higher loan amounts compared to residential mortgages due to the higher cost of the commercial properties.

Loan Terms

Commercial mortgages often have shorter terms, typically ranging from five to twenty-five years. However, some lenders offer longer terms for specific property types or borrower qualifications.

Interest Rates

Interest rates on commercial mortgages are usually higher than those for residential mortgages due to the increased risk associated with commercial properties.

Repayment Structures

Commercial mortgages commonly adopt a variety of repayment structures, including fixed-rate mortgages, adjustable-rate mortgages (ARMs), interest-only mortgages and balloon payments.

Commercial Mortgage Calculator


Advantages of Commercial Mortgages

Commercial mortgages offer numerous advantages for businesses seeking to acquire or refinance commercial properties. These advantages include:

Property Ownership and Control

By securing a commercial mortgage, businesses gain ownership and control over the property, allowing them to customize and adapt the space to suit their specific needs.

Long-Term Financial Stability

Owning a commercial property through a mortgage provides stability and predictability in terms of monthly payments, allowing businesses to budget and plan for the long term.

Potential Appreciation and Equity Building

Commercial properties have the potential to appreciate in value over time, allowing businesses to build equity and potentially benefit from capital gains upon sale or refinancing.

Income Generation

Commercial properties can generate rental income, serving as an additional revenue stream for businesses. This income can help offset mortgage payments, cover operational expenses and contribute to the overall profitability of a company.

Tax Deductions

Interest payments and certain expenses related to commercial mortgages may be tax-deductible, reducing the overall tax liability for businesses.

Leverage for Expansion

Commercial mortgages can provide businesses with the necessary capital to expand their operations, acquire additional properties, or invest in business growth initiatives.

Control over Lease Terms

Owning a commercial property through a mortgage provides businesses with control over lease terms, allowing them to negotiate favorable agreements with tenants and potentially increase rental income.

Commercial Mortgages


Disadvantages of Commercial Mortgages

While commercial mortgages offer significant advantages, they also come with potential drawbacks that businesses should consider. These disadvantages include:

Higher Deposits

UK Commercial mortgages typically require higher deposits compared to residential mortgages, often ranging from 20% to 30% of the property’s purchase price. This significant upfront cost may pose a challenge for businesses with limited capital.

Stringent Qualification Criteria

Obtaining a commercial mortgage can be more challenging than securing a residential mortgage. Lenders often have strict qualification criteria, including strong credit scores, stable business financials and a demonstrated ability to generate sufficient cash flow to cover the mortgage payments.

Higher Interest Rates

Commercial mortgages generally come with higher interest rates compared to residential mortgages. This higher cost of borrowing can impact the overall affordability of the loan and increase the total interest paid over the loan term.

Shorter Loan Terms

Commercial mortgages often have shorter loan terms compared to residential mortgages. While this can provide businesses with the opportunity to pay off the loan faster, it also means higher monthly payments and potential refinancing or balloon payment risks at the end of the term.

Market Volatility

Commercial properties are subject to market fluctuations, which can impact their value and rental income potential. Economic downturns or changes in market conditions can affect the financial stability of businesses relying on rental income to cover mortgage payments.

Property Management Responsibilities

Owning a commercial property through a mortgage entails various property management responsibilities, including maintenance, repairs, tenant management, and compliance with regulations. Businesses must allocate time, resources and expertise to effectively manage the property.

Limited Flexibility

Commercial mortgages may limit a business’s flexibility to adapt to changing needs or market conditions. Selling or refinancing a commercial property before the loan term ends may incur penalties such as Early Repayment Charges (ERCs) or additional costs.


Conclusion

Commercial mortgages offer businesses the opportunity to acquire or refinance commercial properties, providing numerous advantages such as property ownership, long-term stability, income generation, and potential equity building.

However, businesses should also consider the disadvantages, including higher down payments, stringent qualification criteria, higher interest rates, shorter loan terms, market volatility, property management responsibilities and limited flexibility.

By carefully evaluating the pros and cons, businesses can make informed decisions regarding commercial mortgages and leverage these financial tools to support their growth and success in the competitive business landscape.

To discuss a potential Commercial Mortgage for your business, contact Commercial Finance Network today on 01494 622 111 or send us an online enquiry via our Quick Contact Form and one of our CeMAP Qualified Commercial Mortgages Brokers will contact you asap.

Alternatively, if you wish to find out more about what other Commercial Finance Services we offer, then discover more about CFN here.

cfnuk No Comments

ARLA issues stark warning – “Renters are in for a rough ride in 2018”

ARLA Propertymark has issued a downbeat report on the lettings sector’s start to 2018.

Its report on the market’s performance in January says the number of properties letting agents managed fell by eight per cent with 184 per branch compared to 200 in December.

Meanwhile the gap between supply and demand widened in January with more prospective renters coming onto the market; on average, letting agents registered 70 prospective tenants per branch in January, compared to just 59 in December.

The association says landlords kicked off 2018 with contract negotiations as one in five tenants experienced rent hikes in January, compared to 16 per cent in December.

It says that while this paints a bleak picture for renters looking into 2018, it’s actually down year on year. In January 2017, 23 per cent on tenants had their rents increased, and 30 per cent were subject to rent rises in January 2016.

“Renters are in for a rough ride in 2018. Housing stock is falling as rising taxes continue to force established landlords out of the market and deter entry into the sector – and the volume of renters is increasing as the cost of buying a home is moving further out of reach for many” explains David Cox, ARLA Propertymark chief executive.

“The fact that one in five tenants are experiencing rent increases is just another blow. Ultimately, until the prospect of investing in the buy-to-let market is more attractive for prospective landlords, and stock subsequently increases, tenants will continue to feel the burn” he adds.

Source: Letting Agent Today

cfnuk No Comments

BoE official identified a big problem for London’s inflated commercial property market

BoE

LONDON — One of the Bank of England’s most senior officials identified a problem at the heart of London’s inflated commercial property market in a speech on Thursday evening.

Speaking at Imperial College London, Alex Brazier, the bank’s executive director for financial stability strategy and risk said that the way in which investors are attempting to make returns in the commercial property market UK-wide, but particularly in London, is unsustainable in the long run.

That’s because, Brazier says, the market is relying on interest rates remaining very low in the future, while also expecting growth conditions to be favourable. Ultimately, Brazier says, that’s not going to be the case.

“At the UK-wide level, commercial property prices rest on persistently low interest rates but at the same time, they’re factoring in typical rental growth prospects and degree of uncertainty around them,” he told the audience at Imperial’s Brevan Howard Centre for Financial Analysis.

“It seems unlikely that rates can be so persistently low without either weaker growth prospects or more uncertainty.”

London’s West End, Brazier said, is a point of special interest. He described the interest rate/growth prospect dichotomy as being “particularly stark,” in the area.

“In London’s West End Office markets, the picture is particularly stark. Even if the magic combination of persistently low rates and historically typical rental prospects comes true, valuation methodologies similar to those being developed by the industry point to prices 10% below today’s level.”

Here are Brazier’s charts, from a presentation delivered alongside the speech:

No single factor can be blamed for this issue, Brazier said, arguing that a “range of underlying forces have driven down natural rates of interest, including demographics, perceived downside risks, expected productivity growth.”

“Precisely why these markets have become stretched is impossible to know for sure, but I’d caution against placing too much weight on monetary policy as the primary or underlying explanation,” he added.

The story of London’s commercial property market, was for many years, one of rampant expansion and surging prices. There is now evidence, however, that the market has moved into a downturn.

73% of surveyors responding to RICS’ quarterly UK Commercial Market Survey in October last year  said the central London market was at some stage of a downturn, while 67% of respondents said the market is overpriced.

“The feedback to the … survey reflects some of the broader macro issues, with the underlying momentum in the occupier market a little firmer further away from the capital,” Simon Rubinsohn, RICS chief economist said at the time.

Source: Uk Businessinsider