Within the UK’s economy there are a vast number of businesses all competing for the same customers. Regardless of which sector of the market they’re operating in UK businesses need to make use of the highly flexible and adaptable financial systems which are in place to support commercial expansion, and commercial mortgages are an important element in maintaining a business’s financial flexibility. With an appropriate commercial mortgage, businesses are able to minimise their monthly expenditures and improve their overall resilience, and by doing so they can increase their profitability. It’s not good enough simply to get a commercial mortgage; business owners must understand what type of mortgage they need, and how to get it. This article will cover the underlying principles of commercial mortgages to allow companies to pursue appropriate borrowing solutions.
It’s important to bear in mind that just like with a residential mortgage, commercial mortgages are a form of secured lending. This means that whatever assets are used as security can potentially be repossessed if the mortgage isn’t repaid, so there are severe penalties for taking out a mortgage that’s too costly. For this reason it’s vital that anyone considering a commercial mortgage consults a qualified financial advisor who will be able to ensure that their mortgage is suitable for their needs.
Commercial mortgages are a different beast altogether from residential mortgages, and though they share a common purpose they are often structured in remarkably different ways. It’s important to understand the ways in which commercial mortgages differ from residential mortgages, to avoid making any incorrect assumptions.
The main difference between residential and commercial mortgages is that residential mortgages are tightly regulated by the Financial Conduct Authority (the FCA, responsible for protecting consumers across the financial sector). The FCA sets out the terms under which mortgages can be offered and how they can be structured, and it also places restrictions on what lenders can offer to consumers. This protects homeowners who are often inexperienced with financial products and could potentially be exploited. However, there is no such need to safeguard commercial customers, who are assumed to have the expertise (or the ability to hire someone with the expertise) to gauge whether a contract is suitable or not. This means that commercial mortgages are regulated to a much lesser degree than residential mortgages, and consequently are offered in many more varieties than those available to homeowners.
The looser regulation within the commercial mortgage market makes it all the more important for business owners to fully appreciate both the potential benefit of a commercial mortgage and the impact an inappropriate mortgage can have on their business.
The terms of a commercial mortgage vary widely across the many different lenders within this sector, but there are certain traits that all these loan providers have in common. We’ll highlight a few of the most important differences below, and what impact these can have on a business.
A homeowner stands to benefit from paying off the capital on their property; the greater the proportion of their home they own, the more they stand to gain when they eventually sell. However, commercial borrowers have an incentive to keep their monthly costs as low as possible, and minimising their monthly overheads can enable businesses to expand more easily. Therefore, commercial mortgages can often be repaid on an “interest-only” basis, and while this is often more expensive in the long run it does keep monthly costs low.
It might be advantageous for a business to avoid committing capital to the purchase of their property; the less money they have tied up in equity, the more they can spend on other profit-generating assets. Many commercial mortgages are only available with an LTV of 70-75%, though, which requires a generous commitment of capital from the borrower. However, by providing secondary security in the form of an additional property, borrowers can often secure a commercial mortgage for the full purchase price of their property.
Many mainstream lenders will offer tempting rates on their commercial mortgage products, but will stipulate that their customers must also switch their business banking to them as well. This can be restrictive, because the bank with the best mortgage deals might not have very good commercial banking options; it’s a compromise that often fails to produce effective results. However, specialist bridging lenders and commercial mortgage providers can often supply finances without requiring customers to commit to their banking products as well.
Commercial mortgages can be split into two main categories, depending on the position of the borrower. Firstly, there are owner-occupiers; just as with residential mortgages, these are borrowers who intend to use the property themselves. This category consists mostly of business owners who are purchasing property for commercial premises, whether this is a shop, a factory or a restaurant. The second category of borrower is the investor, a borrower who will not be occupying the property themselves but will be purchasing it (or a portion of it). They may be a landlord or they might be part of a larger consortium of property investors, but either way they will have different needs and requirements to owner-occupiers.
Different lenders will have different criteria for each type of client, so it’s important for borrowers to find a lender that can meet their specific needs. Luckily, many commercial finance providers are able to work flexibly, and can often alter the terms of their lending products to suit the needs of each individual client.
It’s important for business owners to appreciate the ways in which commercial mortgages can benefit them; the many different types of loan on offer, and the many ways in which these loans can be structured, means there are plentiful opportunities for business owners to create a bespoke lending solution that’s tailored to their needs. With a firm understanding of how commercial mortgages and finance work, company leaders have everything they need to acquire a beneficial mortgage solution.
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