FISCUS MORTGAGES - INFORMATION AND ADVICE

Commercial Mortgages

As the name suggests, a commercial mortgage is used to finance property purchases for businesses and other commercial organisations. There are many characteristics that businesses share with individuals looking for a home, such as monthly cashflow, however the requirements of commerce leads to difficulties in using a residential mortgage.

The biggest difference between residential and commercial mortgages is that residential mortgage lenders are largely formula driven – an applicant either fits the criteria or they don’t. On the other hand commercial lenders tend to be more flexible in their approach, trying hard to find ways of making deals work. Each commercial deal is assessed individually against the facts of that case and in turn priced individually as well.

In return for a more flexible approach, commercial lenders work on lower loan-to-value (LTV) ratios than residential mortgage providers. With residential mortgages, LTV can be 95% or even higher. In the case of these flexible commercial mortgages, LTV usually works around the 70-75% mark. The added risk of a company defaulting also plays a major part. Lenders will usually have some rights over the property until the mortgage has been paid off. This acts as collateral and allows the mortgage provider to recoup the costs, should the enterprise fall into a state of financial distress. A higher interest rate is also charged, to compensate the lender for the higher risk involved in lending to a business.

WHY CHOOSE A COMMERCIAL MORTGAGE?

There are many reasons why a commercial mortgage is preferable to leasing a property, and these arguments are similar to the pros and cons of renting versus buying residential accommodation.

There are also other benefits of opting for a commercial mortgage versus alternate sources of funding. The most obvious point would be regarding equity in the company. For many businesses, selling off a stake of the company is the only way to raise enough capital for investment. By opting for a commercial mortgage, the equity share of the business can continue in its present form. As a creditor, the bank will only be concerned in ensuring that they get a decent return on the mortgage (interest) and that loan repayments are paid on time and in an orderly fashion. If you have confidence in your organisation’s future, then this equity retention could (literally) pay dividends in the future.

On top of this, there are the tax advantages of a commercial mortgage. The key point here is that mortgage repayments are deducted from gross (pre-tax) profits, thus lowering your tax burden. Additionally, the mortgage interest itself is tax-deductible, which can also lead to a reasonable saving.

The mortgage schedule is usually set down for a number of years, allowing the business to plan its cashflow management and profit / loss accordingly. The choice of mortgage type and interest are pretty open, so one firm may opt for a fixed mortgage while another chooses a tracker. However, as with all mortgages, a payment schedule is put in place that allows the borrower to have an accurate idea of monthly payments and interest.

THE DOWNSIDE TO CHOOSING A COMMERCIAL MORTGAGE

As mentioned earlier, the flexibility available when setting up the mortgage comes at the price of a higher interest rate. In addition, this reflects the higher risk involved in lending to a business entity rather than to an individual.

As with all mortgages, the loan is secured against the property and can be sold if the borrower defaults on the commercial mortgage. ‘Default’ is defined in the mortgage agreement signed with the mortgage provider and would usually occur as a result of bankruptcy, insolvency, late or missed mortgage repayments or any other breaches of the contract.

There is also a major issue to consider when deciding whether to opt for a commercial mortgage or to raise money through a sale of equity. The investors that purchase equity will want to ensure the company’s well-being, so if the business were to fall into financial distress, the interests of all parties involved would be to find a way to keep the company going.

With a mortgage lender involved, there is a conflict of interest. If the business is struggling, the bank may be less patient than an investor, so if there were any breaches of contract they may decide to put the property up for sale and recoup their losses. However, a lender would prefer the company to succeed, as this will generate them more profit than the forced sale of a property. Thus, they are likely to follow a strategy similar to an investor and try to help the company if it seems that it may be able to recover.

YOUR NEXT MOVE IF CONSIDERING A COMMERCIAL MORTGAGE

The only major barrier to entering the commercial property market is lack of expertise and lack of knowledge of where to buy and what type of property to purchase. To ensure success in this area, the best advice is to either do plenty of homework or find an adviser who can do the hard work for you.

A good adviser will help to assess the commercial proposition for which the loan is required. An adviser will factor in the credit risk of the applicant, discover whether the mortgage is a sound business proposition, and ensures that the lenders security value is sufficient and whether the collateral will hold up over time.

By completing our quick enquiry form, we can put you in touch with an Independent Financial Adviser (IFA) that specialises in commercial mortgages. An IFA is not only qualified to provide financial advice, but their independence means that they are not tied to any one lender and can therefore scour the market looking for the best deal for you.