Whether you’re looking to expand or simply get into the real estate market, you’ll probably need to raise some capital in order to do so. There are a number of options out there, from auction finance to construction finance, but one of the more common choices is to take out a commercial mortgage.
Of course, just because it’s common doesn’t mean it’s right for you. The acceptance rate for a commercial mortgage is only 66%, which may be in part due to businesses opting for this option when it isn’t suitable for their needs. Here are the facts about this kind of loan, to help you make the right decision.
What is a commercial mortgage?
Similarly to a personal mortgage, a commercial mortgage is a secured loan intended to provide businesses with the funding they need to purchase land or property. It’s secured against a commercial property, which could include any building that’s used for business use, including:
- Shopping malls
Typically they require a deposit of around 25% of the building’s overall value, while - like most loans - they also come with an interest rate. In the US, this averages between 4 and 5%. You can get a commercial mortgage from a bank or from a specialist lender, with the former usually having better interest rates but being harder to secure.
The main benefit of a commercial mortgage is that the property you purchase will be a business asset that has the potential to increase in value, making it a good long-term investment. Commercial real estate in the US has been increasing in value since mid-2017, which doesn’t show any sign of stopping.
The interest on a commercial mortgage is typically tax-deductible, so although it does represent a cost, it can be offset. You also don’t have to worry about rent increases - although the interest rate for a mortgage can be variable, it tends to be more secure than a rented property and can fluctuate.
The main issue with getting a commercial mortgage is they represent a relatively large up-front cost. Not only do you have to gather a significant deposit, there are also several fees involved. Arrangement fees often cost 1 to 2% of the mortgage’s value, and then there are legal and broker fees, which can vary from business to business.
You’ll also need to typically provide three years’ worth of books in order to secure the mortgage, so it won’t be an option for newer businesses. However, if your company has the capital to pay for the up-front costs, commercial mortgages can be a great way to secure the finance your firm needs to expand.