The Five Pillars Of Every Commercial Mortgage
By: Timothy Frodsham
Any entrepreneur looking to buy their own premises or investors looking to add commercial property to their portfolio, will need a commercial mortgage. Business loans and commercial mortgages are created to assist businesses and individuals raise the capital needed to buy warehouses, offices, shops and factories or other commercial premises.
There are some similarities between the two types of mortgages – lenders will tend to offer a sum of money based on the the property you buy, it will act as security in case of default. However there are some fundamental differences. This easy to follow guide highlights the top five facts everyone should know about commercial mortgages.
1. Deposits for commercial mortgages are higher than for normal home loans: When you decide to purchase a residential property, you will normally have to put down a deposit of at least 10-15 per cent of the asking price. Depending on how risk averse the lender is, will determine whether or not they will require higher deposits, particularly to secure the very best interest rates. Lenders may take into account all manner of personal circumstances before they calculate the size of deposit they will require.
When buying a commercial property, however, you will have to commit a much higher proportion of your own cash. It is not unusual for a commercial mortgage lender to require you to put down a deposit of between 30 and 40 per cent.
2. You may need to provide a personal guarantee: Many buyers look to purchase the commercial property in a company name. However, what happens if the company cannot make the repayments? To avoid this situation, many commercial mortgage lenders will insist that the directors of the company provide a ‘personal guarantee’ – a commitment that they will personally keep up the mortgage repayments should the company fail to pay.
3. Duty Free: If you decide to take out a commercial mortgage, HM Revenue and Customs (HMRC) will treat the interest payments on the capital of the loan as an allowable expense for taxation purposes. Therefore, your company can reclaim the expense of interest payments on a commercial mortgage as a tax deduction when they are preparing the end of year company accounts or the Self Assessment tax return.
4. Commercial Mortgages Can Be Cheaper Than Commercial Lending: It’s a common misconception that a commercial mortgage is the most expensive financing option, people see the word mortgage and deem it expensive and too burdensome a commitment. But if you compare it to standard commercial loan or covering expenses with credit cards and company overdrafts, the interest rates are much more favourable with a commercial mortgage than any of the above as the lender has the property as security against the mortgage.
So, many companies use commercial mortgages not only to buy premises, but also to take the sting of exorbitant interest rates out of their business. Think how much money you might be able to save this way?
5. Commercial mortgages may be structured differently to residential mortgages: Many residential lenders will allow you to take out your mortgage on an interest only basis. However, a commercial mortgage will generally have to be repaid on a capital and interest (repayment) basis. A lender may allow you to make interest only payments for a year or two but the loan will generally have to be converted to a repayment basis after this time.
One final potential option for commercial mortgage payments would interest payments on the mortgage could be set up to be paid quarterly instead of monthly. This option can be particularly helpful for claiming tax deductions from HMRC as it would make the paperwork easier to handle in this regard. As you can see commercial mortgages have many advantages to consider and don’t have to be the drain on finances that their reputation gives them.