Many startup businesses rent their workplace, but after the business is established for a year or two and running profitably, it could be time to look for commercial property to purchase. There are several advantages of purchasing business premises using a commercial mortgage loan.
Mortgage repayments vs. rent
The monthly mortgage repayments will be similar or less than the rent for the same property. If using a fixed rate mortgage, then similar to rent, the business will know exactly how much each month they will be paying for the commercial mortgage.
If the building is larger than a business needs, it may be able to sub-let a portion of it to another business, and this will reduce the mortgage repayments. The mortgage lender may need to give permission for this.
A business will not be vulnerable to any sudden rent increases if you own the building. Any interest rate increases are likely to be small. Interest paid on the mortgage is tax deductible.
Extending existing property
If a business already owns your business property, but requires extra space, a commercial mortgage can be used to add an extension. This will save on relocation costs.
Property is an asset
Buildings that businesses own are assets of the company and will increase the value of the business. Historically, commercial property has increased in value each year and, though there are always risks, business will gain from the capital growth of the property if this continues.
If a business wants to make alterations to a rented building, this usually requires the landlord’s permission. If the business needs to vacate the premises after the alterations have been made, the money spent on them will not be refunded.
A business that owns its own building is in control and can make alterations freely. Extensive alterations could add value to the property.
Commercial mortgage lenders will require a deposit of around 25%, but some lenders will consider a smaller proportion. The business needs to have enough capital to cover this, and must budget for maintenance, security and insurance.
A variable rate mortgage means that interest rates could rise and monthly repayments increase, so a business needs to budget for this possibility.
In the unlikely event of the property decreasing in value, this will deduce the business capital.
Making the final decision
The final decision to purchase business premises using a commercial mortgage loan comes down to cost. If the business has detailed business plans that include being able to pay the monthly mortgage costs, this could mean it is time to purchase. The business also needs a clear idea of how purchasing property will add to its cash flow.
The lender will need to value the property to make sure that it covers the amount borrowed if the business defaults. The business will be required to submit audited accounts, usually for at least two years, together with a business plan that shows how the business will expand.
For further information on buying commercial property and to arrange a mortgage, talk to an Ascot Mortgages advisor.