UK Commercial Mortgages UK Commercial Finance Brokers Buying Commercial Property

Commercial Finance Specialists

We are members of the NACFB (National Association of Commercial Finance Brokers) The NACFB is the only UK trade body dedicated to the commercial finance broker. They represent members from across the whole commercial finance market such as buy-to-let specialists, commercial mortgage advisers, vehicle finance brokers, leasing & asset finance specialists and factoring brokers. All NACFB members comply with an industry recognised Code of Practice.

Who are the NACFB?

The NACFB was formed in 1992 to raise standards of proper professional practice in the commercial broker industry. The aim was to secure the integrity and future wellbeing of the broker market for the benefit of both brokers and their customers. The Association publishes these standards in its own industry recognised Code of Practice, which has been adopted by an increasing number of commercial finance, lease and asset finance and vehicle finance brokers. All NACFB members must abide by this code and any breaches are treated seriously.

The NACFB has established complaints and disciplinary procedures aimed at stamping out unacceptable working practices amongst its members. The Association also aims to protect its members and their clients against restrictive practices within the industry. In the interests of members and their clients, the NACFB monitors legislation and makes representations to the Government and Regulators. It furthers the principles of good practice by seeking to work with other associations and interest groups.

Definition of a UK commercial mortgage

A UK commercial mortgage can be defined as the transfer (or conveyance) of land (or another tangible asset), hereinafter referred to as 'asset'. The asset is transferred from a borrower to a lender in order to secure a loan during the loan period and the asset in question is intended for business use.

The mortgage will be created by the signing of a charge form by the borrower. The borrower is known as the 'mortgagor' and the lender as the 'mortgagee'. The wording of the charge form will vary according to the nature of the asset. In many cases the lender will also want to take documents that prove ownership of the asset, for example, deeds in the case of unregistered land or the land certificate in the case of registered land.

There will be a condition that once the loan has been repaid the transfer will become void or the asset will be transferred back to the borrower.

Commercial mortgages are usually required when:

Buying Land
Buying a UK commercial property i.e. a warehouse
Buying a business
Raising money to pay off debts
Looking for a cheaper interest rate
Expanding your business
A new start up with no history
A well established company looking for extra money
A business with a poor credit history

MCI Brokers Ltd offer a close personal interest in your business with a flexible approach to every situation we will endeavour you receive the finance you apply for. It's our job to find you finance, we do not give up unless there is no where else to go.

UK commercial mortgage

A UK commercial mortgage is probably the best way to finance the purchase of a building(s) and land for business purposes; it provides the most flexible and affordable finance solution.

Commercial mortgages are specialised due to the fact that the lender has a legal claim over the property until the loan has been repaid.

Mortgage loans of this type are tailor made for purchasing any commercial property used for business purposes including shops, factories, offices and warehouses. Commercial mortgages can also be used for taking over an existing business, purchasing a brand new building or buying land. With commercial mortgages, the lender has a legal claim over the property until the loan has been repaid.

Remember, when arranging a mortgage; always consider its effects on your cash flow and assets. This section will give you a general overview about Commercial Mortgages. You should always consult your accountants and financial advisors before finalising a loan to get the maximum benefits and avoid any complications.

Advantages of buying:

Retention of ownership

The business is in a position to raise funds without resorting to selling a share in the company either to an interested investor or by issuing shares. This allows the original owner(s) to retain ownership and control. The lender has a right to interest on the loan and the money borrowed, but not to a share in the business or its profits. The lender can only call in the loan in the event of default and even then only has a charge on the asset, not the business.

Taxation

Mortgage interest payments are made with pre-tax money and are deductable for tax purposes as expenses. In contrast, purchase made from profits, are taken from taxed income.

Financial Leverage

Using a mortgage to buy the property is likely to free up capital held in the business and cash flow for other uses. Borrowing outside a mortgage is likely to be more expensive. In addition, an increase in the value of the property will allow the business to borrow more against it, if necessary.

Cost and cash flow management

Mortgages allow access to capital that would not normally be available. They require limited initial payments and offer a degree of flexibility in designing a repayment schedule to suit the needs of the business, which would include fixing or capping payments for a number of years. Mortgage payments are often lower than rent and the borrower will know what the payments will be in advanced. This fixed overhead helps with cash flow and managing costs. Rental tenants are exposed to market conditions, which mean that rents could rise at a rental review.

Security of tenure

Those businesses that rent have few guarantees beyond the end of the agreement.

Potential asset appreciation

Property has long been seen as a sound investment. The business will have an asset that has the potential to grow in value, which, in turn, will increase the value of the business.

Potential to Sublet

The business might not need all the space the property offers. In this case, running costs could be offset by sub-letting the excess space to another business. The owner business would need to ensure an appropriate rental agreement is used, in order to retain control of the space and ensure it can be reclaimed with minimal effort if expansion is required.

Retirement

It is possible to hold property in a pension plan. This provides a tax-efficient way of buying the premises and enhancing pension benefits.

Disadvantages of buying:

Financial difficulty

The lender will have a charge over the property. If the business runs into difficulty and is unable to meet the mortgage payments the lender will be able to take possession of the premises leaving the business with nowhere to operate from.

Relocation:

If the business needs to relocate it is likely to be relatively easy to end a rental agreement. Where the business owns property, it is more complicated. The owners must decide whether to sell the premises or to let it to another business. Selling will be dependent on the market and suitable purchasers. Renting will tie up the capital and may limit the borrowing for a new property.

Flexibility

In most cases it is easier to end a lease than to sell a property. This will give the business more flexibility. Buying would only make sense if the business is confident of its future and that it is unlikely to need to move in the short term.

Drain on Capital

The business will need to find the deposit, which will usually be taken from profits or reserves. This might have an impact on other elements of the business.

Management Responsibilities

The owner of the property is responsible for maintenance and upkeep, whereas a tenant has only limited responsibility.

Summary

Benefits of a UK commercial mortgage

A UK commercial mortgage provides your business with a major asset that is likely to increase in value and offers a wide range of additional benefits. These include:

The opportunity to consolidate expensive short-term finance
The ability to raise money for working capital or an injection of cash flow
A reduction in the costs of an existing commercial mortgage
An opportunity to increase your earning potential through refurbishing, improving or expanding your business property
Avoidance of exposure to just one lending source for both business banking and property investment
Mortgage repayments may be similar to rental payments - therefore no need to budget for additional property expenditure or any increase in rent
The interest on a commercial mortgage is tax-deductible

Disadvantages of a UK commercial mortgage

A UK commercial mortgage is a long-term commitment and similar to a residential mortgage it will need to be paid off during or at the end of the mortgage term.
It is vital to ensure all repayments are made on time. Failure to do so will accrue additional interest and if you continue to default on payments it can lead to your property being repossessed and a poor credit status will apply to your credit file.

Subjects covered:

Introduction

If you decide to buy property for your business you will probably need a UK commercial mortgage. Before you take one out, it is essential that you consider the maximum monthly mortgage repayment your business can afford. You should also take into account the potential growth of your business as relocating too often can be costly.

The following gives some basic information on what a UK commercial mortgage lender will need from you, what kind of professional advice is available and what the various costs are. It also looks at the pros and cons of buying, compared with renting.

An overview of the UK commercial mortgage

You may need to take out a commercial mortgage to buy premises to start or expand your business or if you are buying a business that is directly linked to property, e.g. a hotel or retail outlet. Mortgages are usually for 15 years or more and the property itself is at risk if payments are not made on time.

Meeting the UK lender's criteria

Most banks and building societies offer commercial mortgages, but you must satisfy their criteria. Most lenders require that you have a good understanding of your business, a positive personal credit rating and clear evidence that your business is creditworthy, although some lenders may accept applications where there is an adverse credit history.

Most lenders will apply a loan-to-value ratio and will expect you to invest a proportion of your own money in the purchase. The more you are willing to invest of your own money, the greater the chance you will have of securing a loan for the remainder.

The loan-to-value ratio is the loan amount divided by the current market value of the property expressed as a percentage. If a property has a current value of £200,000 and a loan is required for £150,000, the loan-to-value ratio is 75 per cent.

The lender's decision will also depend on your current business circumstances - UK commercial lender will expect your business to be stable and profitable. They may ask to see your business plan and long-term financial projections, to assure themselves that your business has and will continue to have the ability to make repayments on the loan.

Some lenders may impose restrictions on the uses of commercial premises, e.g. your ability to sublet to other businesses and certain business concerns may be excluded altogether. You will need to consider carefully all the terms of any lending agreement, particularly as the loan period may be for 15 years or more. This is a complex area and it's essential that you seek specialist advice from your solicitor and probably a chartered surveyor.

Pros and cons of buying UK business premises

Buying commercial premises can be a good investment - owning a property gives your business stability and the property itself can become a significant asset. However, it is a major step and before you commit, it is important to think carefully about the pros and cons.

Advantages of buying UK business premises

There are considerable advantages to buying:

your mortgage repayment is likely to be similar to a rental payment on the same property
with a fixed rate mortgage, your monthly repayments will be predictable
you aren't exposed to any sudden rent increases
you may be able to sublet any free space, reducing your monthly repayments (you may require permission from your lender to do so)
interest payments on a commercial mortgage are tax-deductible
any gain in value of the property will increase your capital
as your business grows, you may be able to extend your existing premises, avoiding relocation costs

Disadvantages of buying UK business premises

Disadvantages include the following:

Unlike renting, you'll need to come up with a substantial deposit - this is money that might be used for more important business purposes.
If you own premises, you may find it harder to relocate your business, because selling business premises is not always easy. If you rent, you may be able to negotiate to end your rental agreement, or to find another organisation to take over your tenancy.
If you have a variable rate mortgage, you are exposed to increases in interest rates.
Owning a property means you'll be responsible for factors such as maintenance, fixtures and fittings, insurance, decoration and security.
Any loss on the value of the property will decrease your capital.

What UK lenders need to know?

Any mortgage lender will want to be sure that your business is on a sound financial footing before agreeing to a UK commercial mortgage

A lender's main concerns are that:

you will be able to repay the money
the property is worth enough to cover the amount borrowed if you default

Set an upper limit of what your business can afford to repay every month. Don't be tempted to over-borrow - doing so could deny your business the cash-flow it will need to grow. Do not over estimate the value of a property. A lender will almost certainly appoint a surveyor or property appraiser to inspect and estimate the value of the premises.

You will be asked to provide information about your business' financial performance, which will probably include:

audited accounts for the last two years
indications of current performance
a profit-and-loss forecast for the next year
business bank statements for the previous six months
identification of each partner or director in your business for credit-checking
asset and liability statements for each applicant
a business plan showing how the property will contribute to your cash-flow and how you intend to repay the loan

If you are buying a business and property combined, it is likely you will need to supply the lender with additional information, such as:

why the business is being sold
projections on how the business is expected to grow
details of any personal investment there might be
credit status of the business

Bear in mind that you will almost certainly need to find a deposit - perhaps between twenty and thirty per cent of the purchase price of the property. However, depending on the availability of security or other factors, some lenders may be more flexible

Different types of UK lenders

High street banks and building societies are not necessarily the best places to start looking for a UK commercial mortgage, although major banks often have advisory services which can be helpful. If you have a good relationship with your bank, it is worth checking to see if they can help you.

It may be worthwhile locating a specialist lender who understands the specific needs of your industry. There are also many lenders online. Be careful which one you choose and ensure that they are certified.

Using UK brokers

A mortgage broker's role is to help you to find the best mortgage to suit your needs, giving you impartial advice on products and steering you through the mortgage application process.

It's important for small businesses to get the right kind of finance at the best price. Many commercial brokers work in specific business sectors and someone working in your sector might be able to help find you a special deal.

Using a broker can save you a lot of time, as they have specialist market knowledge and will be able to find certain deals that are only available through brokers.

Check that your broker is independent - instead of being tied to just one lender - and will consider all the available options on the marketplace. MCI Brokers Ltd is an independent mortgage broker.

Repaying a UK commercial mortgage

Commercial mortgages may carry higher interest rates than residential loans because you are considered a higher risk - particularly if your deposit is lower than twenty per cent. The term of the loan will be at the discretion of the lender and is typically between ten and twenty years.

Interest rates

There are two interest rate options - variable or fixed. Rates are usually set between one and six per cent above the Bank of England base rate, some times the 'London Interbank Offer Rate (LIBOR) is used.

Most commercial mortgage schemes have variable rates and will fluctuate in line with the Bank of England base rate. Your repayments may rise or fall and you should budget accordingly.

A fixed rate means your repayments are fixed for a certain period of time, usually two to five years. At the time when the rate is fixed, it will usually be higher than the variable rate, but it will allow you to plan your budget more reliably. At the end of the fixed rate period the rate may change to a market variable rate or you may have the right to renegotiate the loan.

Repayment methods

Different kinds of mortgages are repaid in different ways. With a repayment mortgage - sometimes called a capital and interest mortgage - you repay a portion of the loan and the accrued interest each month. An interest-only mortgage means only the interest is paid off with each monthly payment. To be eligible, you may need to have an accompanying insurance or pension policy that will mature at a value close to the outstanding lump sum. You will certainly need to show that you will have the means to pay off the loan at the end of the term.

You should seek advice from a suitably qualified financial adviser before committing to a mortgage that relies on the proceeds of an investment or a pension to repay the loan. If you have an existing product, such as an endowment mortgage, you should also seek regular financial advice due to changes in the stock markets.

UK Commercial mortgage fees and costs

Interest rates vary according to the lender and the repayment options you choose. Other fees and costs include:

Arrangement or processing fees - these are fees that your lender charges for arranging your mortgage. A typical fee might be in the region of 0.5 to 1.5 per cent of the loan and is usually negotiable.
Valuation fee - this is the fee charged by the lender for carrying out the valuation of the property and can vary according to the lender. Further costs are incurred if the lender insists upon a full structural survey to establish the valuation.
Redemption penalty - if you pay off your mortgage early, you may have to pay an additional amount, which is also known as an early repayment penalty. This is usually applicable in the first three to five years of the mortgage, although it can sometimes apply after that.
Legal and professional fees - these can include insurance, site surveys and preparation of legal documents.

There are certain other factors of which you should be aware:

minimum level for the loan - commercial mortgages are usually only given for substantial amounts, ranging from £15,000 to over £1 million, with higher sums in other circumstances depending on the value of your property and the nature of your business
period of grace - some lenders are flexible about late payments, underpayments or payment holidays - but you may incur increased interest charges
personal guarantee - if you run a limited company, the bank may ask you for a personal guarantee as additional security, especially if the amount of cash you are investing is limited

Finding a lender

For help to find a competitive lender Contact MCI Brokers Ltd UK