nigel woollsey

Nigel Woollsey

Online Writer
Published: 12/03/2019

At a glance

  • Business owners are faced with the choice of either renting premises or taking the step of buying a property through a commercial mortgage.
  • Commercial mortgage deals can offer fixed or variable rates, just as with a residential mortgage.
  • Renting has the advantage of leaving maintenance costs to your landlord.

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 several 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.

Compare commercial mortgages

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…

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.

A mortgage broker can help you to find and compare the commercial mortgages. 

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.

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 20% 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 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) – to ensure that you are getting the best advice for you and your business.

Pros and cons of buying a commercial property

  • 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.
  • 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 20-50%.
  • Owning the property can make it harder to move if your business needs to.

Pros and cons of renting a commercial property

  • Easier to relocate 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.
  • 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.

Moneyfacts tip

Moneyfacts tip nigel woollsey

While variable rates may be low now, remember that rates may go up in the long term, meaning you could be paying significantly more in the future. Therefore, it’s important that you don’t overstretch yourself financially and make sure you can afford repayments even if rates go up.

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.

coffee shop front

At a glance

  • Business owners are faced with the choice of either renting premises or taking the step of buying a property through a commercial mortgage.
  • Commercial mortgage deals can offer fixed or variable rates, just as with a residential mortgage.
  • Renting has the advantage of leaving maintenance costs to your landlord.

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