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Why should I purchase property instead of letting?
Purchasing property is a large decision for any business. There are several advantages and disadvantages that should be considered before making your decision.
Advantages:
Fixing your overhead costs. When you finance your purchase with a mortgage, have a repayment schedule that sets your fixed expense each month. Potential asset appreciation. Potential to sublet. If you purchase more space than your company currently needs, you could sublet a portion of it until you need the space. Mortgage payments may be cheaper then rent. When you set your repayment schedule you know what your payments will be in advance. If you rent your property, you are exposed to market conditions that may increase your rent to above what your mortgage payments would have been.
Disadvantages:
Harder to relocate. If you have a lease and decide to change locations the process is relatively simple. When you own the property, you need to determine if you should sell the land or find a new tenant. Drain on cash. A mortgage will not provide 100% of the financing needed to acquire the property. You will need to use your current cash to finance a down payment and pay for any related expenses. More management responsibilities. When you let the property, the landlord is responsible for the upkeep and security of the property.
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What is the usual length of
a mortgage?
Mortgages are typically available for any time period between
5 to 25 years. For commercial mortgages the maximum length of
the mortgage is usually 20 years for newer properties and 15 years
for older properties.
How much cash do I need to provide
for a down payment?
Typically lenders often view mortgages with larger down payments
as more secure. Most lenders typically like to receive 20% to
30% of the purchase price as a down payment. Depending on your
company's financial history, as little as 5% of the purchase price
may be required for a down payment. (You will most likely have
to pay a higher interest rate to compensate for the smaller down
payment). Remember the larger your down payment is, the less you
have to borrow.
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How should the mortgage be
structured?
If possible, you should form a separate business entity to lease
the building to your operating company. This separate entity should
then arrange for a non-recourse mortgage for the purchase of the
property. This should protect your operating business if you default
on the mortgage. You may wish to consult your accountant or tax
advisor.
How can I improve my chances
of getting a mortgage?
Be prepared to demonstrate why you have a solid chance of repaying
the mortgage. The lien on your property adds security but the
lender will still base their decision on your ability to repay
the mortgage. It will be extremely beneficial to be able to show
the lender a history of your earnings and a projection of future
earnings. Also expect the lender to arrange for a property appraiser
to estimate the market value of the property; this will help the
lender feel that the property is sufficient collateral for the
mortgage.
Who is responsible for
the repayment of the mortgage?
The legal structure of your company will determine who is responsible
for the repayment of the mortgage and who will be liable if it
is not repaid. If you are a sole trader, you bear all the responsibility
and potential liability. If your have formed a partnership, all
of the partners involved are jointly and individually responsible.
If you a legal company, the Directors may be liable if the mortgage
is not repaid.
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