Commercial Mortgages/Remortgages

In all probability a commercial mortgage is the best way to finance the purchase of property for your business. A mortgage normally provides the most flexible and affordable financing solution by taking advantage of keen interest rates and a long repayment term. However, please note that the lender will have a legal claim (1st charge) over the property until the loan is fully repaid.

Mortgages may be structured in several different ways, and the key considerations are as follows:

Interest rate – fixed or variable?

If the interest rate is fixed, it is set at the beginning of the mortgage period based on the risk involved and money market rates at the time. The lender will normally factor in his expectations about the future cost of money (interest rates) also. However, the fixed rate insulates the borrower from future movements in interest rates, and in the monthly repayment amount.

If the interest rate is variable the initial rate is also set based on risk involved and money market rates at the time. However, over the life of the mortgage it will move in line with changes in interest rates generally, either based on the Bank of England base rate or LIBOR. Utilising a variable rate loan means that the lender saves money during times of low interest rates, and pays more during times of high rates.

Type of mortgage?

Repayment – in this type of mortgage the monthly payments are calculated to cover the interest due plus an element of the loan such that at the end of the loan period it is fully repaid.

Interest only – the monthly payments in this type of mortgage do not include any element of the principal, and at the end of the period the full loan remains outstanding. Obviously this means lower repayments during the period of the loan.

A combination of both types, normally interest only in the early years switching to a full repayment mortgage later.

Note that mortgage interest paid is fully allowable as a business expense for tax purposes.

Buy or rent?

Purchasing a property is a major decision for any business and requires careful consideration. The following listing is not intended to be exhaustive.

Advantages:

• Potential appreciation in value of the asset.
• Mortgage payments may be cheaper than rent, and most certainly will not be subject to regular upwards only reviews.
• Potential to sublet part of the property until needed thus reducing the overall costs.
• Reasonably predictable monthly repayment costs.
• Security of tenure.

Disadvantages:

• Initial cash cost – a mortgage will, at best, provide 95% of the cost of the property, and will be in the region of 85% in most cases.
• Initial set-up costs – valuation, legal fees etc., although note that all of these are allowable for tax purposes.
• Failure to repay on schedule may lead to the loss of the property.
• Property ownership managerial responsibilities.

Remortgage applications are also welcome.

NFS has extensive contacts within the commercial mortgage industry ranging from high street banks to specialist lenders. A decision in principle can normally be obtained within 24 hours of application.