When you are looking for a commercial mortgage loan, there are many other costs you have to take into account besides the actual amount of the loan. Some of these are similar to the costs of a residential mortgage. The costs include:
Arrangement fees. These are the charges the lender makes for setting up the commercial mortgage loan. The fees are typically around 0.5-1.5 per cent of the total loan amount. However, with the market being increasingly competitive, you may be able to negotiate a lower fee. In fact some lenders may waive the fee altogether in order to secure your business.
Survey and valuation fees. The lender will of course insist on carrying out a valuation of the property and will charge you the fee. The valuation is not a structural survey but they may do a structural survey as well – this will cost more. If they don’t do a structural survey, you should seriously consider commissioning one yourself, as structural faults found after purchase could cause you serious problems. The lender may also charge you a site survey fee.
Legal fees. It is highly advisable to use professional legal services rather than trying to do it yourself (unless you are a law business of course). There could be all sorts of complications in the purchase of commercial premises. Because there are often so many complexities in the purchase of commercial property, you should expect legal fees to be higher than for residential purchases.
Title insurance. This is to protect the lender (and the borrower too) against losses that arise from defects in the legal title of the property, which may not become apparent until after the sale has taken place. Having this insurance can sometimes help to reduce legal fees, by simplifying the conveyancing process. Of course you will also require other insurance policies including building and contents insurance, employer’s insurance etc.
As well as these extra costs, there are other things you need to be aware of.
Minimum loan amount. You are not likely to be granted a commercial mortgage loan for less than about £20,000.
Defaulting. If you have legitimate reasons for defaulting on your payments, such as an acute cash flow crisis, need for a major repair, or a debtor going out of business, lenders vary in their degree of flexibility. Some may accept late payments but will probably impose increased interest charges.
Redemption penalties. Obviously you want to pay off your commercial mortgage loan as soon as possible, in order to remove this drain on your profits. However some lenders will want to charge an early repayment penalty – in some cases, only within the first 3-5 years. Try to negotiate flexibility when you take out your loan.
A commercial mortgage loan is part of the reality of business life, and most businesses will require one at some point. It is essential to weigh up all the extra costs before taking the plunge and deciding whether to apply, and how much to apply for.
Please note that the FSA do not regulate commercial loans or commercial mortgages