Many businesses will require premises to work from. This might include stores, factories, offices, warehouses and so on. Securing the property for your work premises often comes at a price, such as through monthly rent payments.
If you choose to buy your premises outright, you will need to pay the cost upfront. Real estate doesn’t come cheap, especially if you’re new to trading and haven’t amassed the reserves it takes to buy one outright.
A business mortgage aims to make the cost of securing commercial property more affordable. With one, you will still need to have the balance of the funds to purchase the property, around 25-35% of the purchase price.
However, as with any type of loan, there are considerations you need to make when selecting and applying for a commercial mortgage on behalf of your business. We explore what you should do to secure a business mortgage and the factors to contemplate below.
How do I get a business mortgage?
There are many providers of business mortgages now, including high-street banks and alternative lenders. Due to this, there is more choice than ever, enabling you to find the best option for your needs.
One of the first things to be aware of is that mortgages will tend to come in two categories: owner-occupier and buy-to-let. Owner-occupier is when you are purchasing the premises to use for your own business to operate out of, while buy-to-let is when you buy property to rent to other companies, this could include private tenants.
There are also different purposes for a mortgage, which might affect which one you select. These include:
- To fund the development of an existing property you already own
- To extend your current premises
- To buy a property that’s for sale
Due to the scope of the market, mortgages can usually be tailored to the business, depending on the property or land you are purchasing, the deposit you can afford and any other requirements. If you are hoping to get a mortgage with a specific provider, it’s worth discussing with them to see what they can specifically offer to you.
The qualifying criteria for a mortgage will vary between lenders. Most traditional lenders will expect to see information about your financial and trading history, the property being purchased, and your use of the premises. Alternative lenders may be more open to risk if your company falls into a higher-risk category, but again it’s essential to have this conversation with the lender first.
When you begin the process, you must shop around. Different lenders will offer different mortgages depending on the panels and underwriters they use. As such, you may experience a reasonable degree of variation between mortgages as they seek to remain competitive. This is where knowing what to consider can help to refine the right choice for your business.
What to look out for
There are many considerations to make when choosing a mortgage. We’ve boiled down the most significant factors to compare different products and lenders.
Interest rates
Generally speaking, the lower the interest rate, the better. With low interest, you will make loan repayments more affordable. However, this will also depend on the size and length of the mortgage. If you are a higher-risk applicant, this may cause your interest rates to increase.
The good news is that mortgages tend to be relatively low-interest as the property being bought can be repossessed if you fail to keep up with your payment plan, which helps secure the loan and lower the risk to the lender.
You also need to decide if you want a variable or fixed-rate mortgage. A fixed-rate mortgage will keep interest at the same level for many years (as dictated by your contract), so repayments are predictable and don’t fluctuate too much month-to-month. A variable-rate moves with the base rate of the lender, so interest rates fluctuate so do your payments. This also makes it harder to predict your monthly payments as they are subject to change.
Deposit required
Even with a mortgage, you will need to pay a deposit towards the property or land you are buying. The amount you pay upfront will vary depending on how much the lender is willing to cover.
Business mortgages tend to require a higher deposit compared to buying your primary residence, so that you can expect a contribution of 25% or higher. A sizeable deposit will also offset any risk associated with giving you a loan, so it is likely to reduce your interest rate. It will also boost the loan to value ratio of the mortgage, making you more desirable to a lender and should result in a lower interest rate.
Length
Mortgages are a long-term form of finance. On average, a business mortgage will last typically be in the 15-25 years, but some lenders will go up to 30 years. The longer the timeframe, the more years you will be paying interest – but a longer-term can also lower the monthly costs.
When choosing a mortgage, you need to consider how long you are willing to commit to making repayments and what you can afford each month. This will help you find a healthy balance where you have the loan hanging over you for as short as possible while enabling a manageable repayment plan that does not overwhelm cash flow. Most lenders tend to commit to the mortgage for, say, a 10-year period, but profile the payments over a longer period. At the end of the commitment period, you have the opportunity to refinance with the existing lender or switch lenders.
Fees
When you take out a mortgage, it’s not just the price of repayments you need to consider. Many will come with fees, including valuation, arrangement and legal fees. Lender fees may also apply and typically cost around 1-1.5% of the loan value. Sometimes, these fees aren’t clear upfront, so it is sensible to ask the lender in advance.
You will typically need to pay these fees upfront, alongside your deposit, or they can be added to the cost of the loan. So, make sure you’re aware of them and have the funds you need to cover these. If a loan has extortionate or hidden fees attached, it might be a sign to consider a different lender.
Commitment
Once you take out a mortgage on a piece of land or property, you are committed long-term. With this in mind, it’s important to ensure that the property is in the right location to enable your business to thrive in the long-term.
It’s also critical to remember the other costs associated with your business premises that a mortgage doesn’t cover. These include energy bills, repairs and maintenance. If you aren’t prepared to commit to these long-term expenses, it may be worth considering renting a property instead. There is also more flexibility with a rental property as you have the ability to move more easily due to smaller commitment periods.
Conclusion
If you are looking to secure property on behalf of your business, a mortgage is a valuable tool in enabling you to do so affordably. However, it’s crucial to find the right mortgage for you, so you can get the premises you want without placing too large a financial burden on your operations.
By understanding the various criteria and factors that make up a business mortgage, you are better equipped to compare the options on the market and select one that supports you in the long-term running of your business,
If you’re searching for a business mortgage, speak to one of our advisors to find a perfect fit for you.