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Pros and cons of a commercial mortgage

This article is part of
Guide to Commercial Mortgages

Compared to other forms of finance, Craig Pollock, senior manager property for Bank of Scotland Commercial, says it is relatively cheap to borrow funds for commercial property.

He says: “It is a simple product with a defined monthly payment making forecasting in the short term easy to do.

“It can ensure that cash remains in a business in liquid form rather than tied up in a long term asset It matches long term income (if a lease is in place) to long term funding.”

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If you need to expand your business or commercial or residential investment portfolio, gain more storage space or buy your own office premises for the first time, Rob Lankey, managing director of commercial mortgages at Aldermore Bank, says a commercial mortgage could help.

He says: “It is likely that your monthly mortgage repayment will be at a similar level to or less than the rental payments you would have been paying, and you won’t suffer from any sudden rental increases. Additionally, interest repayments on a commercial mortgage are tax-deductible.

“Certainly if you borrow in a company name, you will be required to take out a commercial mortgage, but it can also make sense in your personal name as it is normally best to not use your home as security for business loans.”

A commercial mortgage may also allow you to increase your working capital by capital raising on your property to finance a larger cost for the ongoing investment into your business, Mr Lankey adds.

He points out commercial mortgages can help you to break free of what can be restrictive lease agreements putting you more in control of your future.

On the negative side, Mr Lankey says when you sign a commercial mortgage contract you are signing up for a longer period of between five to 30 years, which is a big commitment.

Mr Lankey says: “If you fail to make repayments on time you may have to pay additional interest and, if this happens repeatedly, the property can be repossessed.

“If you are on a variable rate, you may [also] find your monthly repayments will increase.”

While repossession can happen on a residential property, Mr Lankey warns it can happen much faster when it relates to a commercial property.

If the property is an investment, he says the lender will be able to appoint what is called a Law of Property Act receiver who is entitled to take the rental income from the property and pay it straight to the lender to keep the mortgage up to date.

Mr Lankey says you will also need to come up with a substantial deposit to obtain a commercial mortgage, perhaps between 25 per cent and 35 per cent of the property value and there may be added complications with environmental, planning and licensing issues.

He says: “Any property depreciation will impact upon your business capital.”