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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

Key Features of Commercial Mortgages

Advantages of Commercial Mortgages

Disadvantages of Commercial Mortgages

Conclusion

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.

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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.

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Commercial property market growth prediction

The commercial property market could see returns grow by 6.4 per cent in 2021, real estate firm Colliers predicts.

The growth would be made up of 4.8% income return and 1.6% capital growth.

This follows a 2.3% decline in all property total returns in 2020. The firm says industrial and supermarket assets will be the most popular with investors in its latest Real Estate Investment Forecasts report.

Oliver Kolodseike, deputy chief economist at Colliers, said: “Latest business and consumer confidence survey data suggest that the economy will bounce back strongly in Q2. This is heightened by consumer confidence rising to its highest level since before the start of the pandemic, adding to hopes that the consumer sector will help drive the economic recovery.

“Mild rental growth will result in a slight reduction in yields in the short term, but we expect yields to then generally shift out in line with the trends for the Bank of England Bank Rate and 10-year government bond yields.”

Colliers predicts that over the five-year forecast, industrial and supermarkets will be the best performing sectors.

All retail total returns are expected to show marginal growth of 0.6% this year, having suffered a 12.4% decline in 2020.

The office sector has also been going through structural change with lease lengths shortening according to Colliers.

While the proportion of deals signed with lease commitments in excess of three years averaged out at 77% between 2016-2019, in 2020 the equivalent number was down to just 53%.

To find out more about how we can assist you with your Commercial Finance requirements, please click here to get in touch

Colliers expects all industrial yields to stand at 4.73%. Going forward, the firm predicts a stabilisation in 2022 and very mild outward shifts thereafter.

Given the ongoing strength of rental growth, all industrial total returns will show growth of 16.1% this year, the firm says, before slowing to a more sustainable rate of 5.4% in 2022.

John Knowles, head of National Capital Markets at Colliers, added: “It is particularly hard to forecast across all sectors over the next six months, however it does seem that industrial will continue to benefit from a demand driven market, much as it has done over the last 18 months. I have high hopes for the office sector, as confidence returns as people start to occupy their workplace again and business travel should open up to some extent over the next couple of months.”

Source: Punchline

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Six facts you need to know about commercial mortgages in the UK

Commercial mortgages are the mortgages that are acquired on different commercial properties. These properties can include shops, office buildings, industrial buildings, factories, apartment complexes, and other such buildings. Simply put it is the loan that you secure on a property that you own but it is not your residence and is being used for some commercial activity. The loan is usually used to acquire, redevelop or refinance the commercial property against which it is being taken. As every commercial property holds a different value it one of the challenges of commercial mortgage is that it has to be assessed differently for each property. To find out more about commercial mortgages you need to go through the following 6 facts about commercial mortgage in the UK.

Difference between commercial mortgage and business loans is that business loans that are usually up to £25,000 don’t need to be secured and can be acquired easily from most of the lenders across the UK. However, if you want to get a loan that is higher than £25,000 then the lenders require you to give them some sort of security in return. This is to make sure that the risks to the lender are reduced. Furthermore, there are many legal and administrative costs that are involved in the when you take a loan on a commercial property which is one of the reasons that most of the lenders don’t advise you to take this loan if the amount is less than £50,000. Some lenders have a minimum limit of £75,000 when the commercial mortgage is involved.

Most of the people are confused about how much they can borrow while when they are thinking about taking a commercial mortgage. Well if you are the owner of the property you will easily find the loan between 70% to 75% of the value of the property against which you are taking a loan. If you want to acquire a loan against an investment it will be determined by the money it is generating through rental income but it will not exceed 65% of the value of the property. If it is a business which includes stocks and goodwill etc. then the amount will be further reduced accordingly.

People often get confused about the arrangement fee and why it is being added to the loan. Most of the lenders ask their clients to deposit a non-refundable arrangement fee that is usually 1% to 2% of the actual loan. This fee is sometimes added to the total loan that you are asking for and sometimes the lenders ask the clients to deposit it along with the application form. This fee is considered as a fee of the lender for processing your loan application. Even if your loan application is rejected this fee will not be returned to you. With loans up to £ 1 million the fee is usually 1-2% but as the mortgage amount decreases this percentage increases.

A valuation fee is also a topic of concern for many people who are seeking commercial mortgage in the UK. As mentioned earlier commercial properties are far too variable in their value as compared to residential properties. If you want a loan against any residential property you will not be required to pay a valuation fee but for commercial value an expert has to visit your property and prepare a document of 20 to 30 pages indicating the current value of your property and for that you have to pay the lender or the third party used for evaluation.

Legal fees are also to be paid by the person who is seeking a commercial mortgage and they have to pay for themselves and the lender. The legal fee depends upon the complexity of the contract but they usually start for £500 for each party. If you choose different lawyers in the same firm to represent you and the lender this amount can be reduced.

Commercial mortgages are usually long-term loans and their time can range from 3 years to 25 years. If you are looking for something that is a little short-term there are loans available for that too. These are called bridging loans or property development loans and their time period is usually from a few weeks up to 2 years.

Source: London Loves Business