Any prospective commercial property owner should make sure that they are as well informed as possible before they decide to take the plunge and invest large sums of money. Commercial mortgages are different from regular home loans; they are designed to help you raise the capital you need to purchase offices, shops, warehouses, 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 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. A higher deposit than normal will have to be paid for a commercial purchase: Ordinarily, when you are buying a residential property, you will have to find a deposit of about ten to fifteen per cent of the price of the property. Some lenders will demand higher deposits, especially to secure the very best interest rates.
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. The personal touch may be required: Commercial mortgages are normally offered to individuals and partnerships, not just companies. If you are looking to borrow on behalf of your company, perhaps to buy business premises, it is more than likely that the directors will have to offer ‘personal guarantees’ to a lender. This obliges directors to intervene and offer payments to the commercial mortgage if the business fails to keep up with the payments.
3. Mortgage payments are generally tax deductible: Every year, you or your business will have to prepare company accounts or a Self Assessment tax return. One of the advantages of a commercial mortgage is that your interest payments are an allowable tax deduction. HM Revenue and Customs will generally allow you to claim the interest payments on your commercial mortgage as a permitted business expense.
4. Lower Rates: Anyone how has ever run up a credit card will know that secured loans are cheaper than unsecured ones. Borrowing for business purposes is always cheaper if it is being done through a commercial mortgage. One key advantage of the commercial mortgage is the interest rate. They are normally charged at a rate lower than other forms of credit. This is because the lender has the security of the property as collateral.
Consolidating other business borrowing that may be charging much higher interest rates can therefore save you money. Lots of firms use a commercial mortgage to repay other, more expensive, funding.
5. Commercial Mortgages have a different structure to residential mortgages: Even though there are some similarities between the two kinds of mortgages, commercial loans are often structured in a slightly different way. You are unlikely to find a commercial loan on a pure ‘interest only’ basis. A lender might allow you to have interest only payments for a year to eighteen months, a loan will generally have to be repaid on a standard capital and interest basis eventually.
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.
Howard O’Gollegos writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.
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