Funding - mortgage or rent?

There are various pros and cons, outlined below, associated with buying or renting a commercial property for your business. It is important that you consider all of your options for obtaining a commercial property, and decide on which method would be most beneficial for you and your business. 

Through our network of trusted advisors in this field we can help you gain the advice you need from them in order to secure the most appropriate option for your business. Contact our commercial property team today on 0203 816 9303 for a free, no obligation initial chat with one of our legal advisors or complete an online enquiry form and a member of the team will contact you to discuss your situation.

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Buying a commercial property

Pros:

  • Some lenders offer fixed rate mortgages on commercial properties, giving you a set period of financial security.
  • You will not have the worry of large, unexpected rent increases.
  • If the value of your property increases, so too will the value of your business’s assets.
  • Some mortgage lenders may allow you to sub-let some or all of your commercial property to other companies, generating additional income for your business.
  • The interest on the mortgage payments for your commercial property is tax-deductible.

Cons:

  • If you have a variable rate mortgage on your commercial property, your repayments will rise in line with interest rates.
  • Your business’s assets will decrease if the value of your commercial property drops.
  • Owning the commercial property means you will be liable for all maintenance.
  • In order to get a mortgage for a commercial property, you will most likely need to provide a deposit between 20% and 30% of the value of the property.
  • Being tied into a commercial property through a mortgage can make it more difficult to move your business if you need to.

Renting a commercial property

Pros:

  • It is much easier for your business to relocate if you need to expand.
  • You do not have to tie up a large portion of your business capital in a mortgage deposit.
  • Some building maintenance may  be handled by your landlord; albeit you may have to contribute to this within service charge payments
  • Fluctuations in property prices will have minimal effect on your business.

Cons:

  • Rents can sometimes be  out up  by significantly large amounts, which can put your business’s cash flow under immense pressure.
  • The rent will be seen as an “empty” expenditure; you will not own the commercial property.
  • Any increase in your commercial property’s value will not represent any benefit to your business.

If you have decided that taking out a commercial property mortgage is the correct step for you and your business, there are a few things you will need to take into consideration before you go any further.

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Evaluate commercial property mortgages

If you have an existing business account with a bank or building society, they may also be able to offer you a commercial property mortgage. Although this offer shouldn’t be dismissed, you also shouldn’t accept without exploring your options first. It is vital that you compare with other commercial property mortgage providers to ensure that you are getting the very best deal available for your business.

Make sure you can afford the repayments

Be sure to set a maximum amount for the monthly commercial property mortgage repayments that your business can comfortably afford. Remember, you could put your business and its assets at risk if you do not keep up the repayments on your commercial property mortgage.

Another thing to consider when setting your monthly commercial property mortgage repayment level is interest rates. While variable rates might be low at the moment, they may go up in the future, which could mean your monthly repayments will cost significantly more. A capped rate commercial property mortgage could be your best option; this gives you a payment ceiling if interest rates go up, but also allows your business to take advantage of the lower rates.

Ensure you budget your cash flow for a deposit on a commercial property

Lenders will generally require a sizeable deposit for a commercial property mortgage, with some lenders asking for deposits of up to 50 per cent. 

The size of the deposit you will have to lay down for your commercial property will depend on a number of factors, including the type of commercial property you are looking to buy, and the amount of money the lender assumes that you can afford to borrow. 

If your lender thinks you cannot afford the commercial property mortgage that you are applying for, they may reduce the amount of money that they are willing to lend your business. This essentially means that you will have to put up a larger deposit.

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As an award-winning top 150 law firm, with over 450 staff based in offices across the country, you're never far from the advice you need.