Are you considering purchasing a commercial property for your business? Owning your premises can be a game-changer, offering stability, potential financial benefits, and the freedom to tailor the space to your needs. However, diving into the world of commercial owner-occupier mortgages can seem daunting. This guide will walk you through the current lending landscape, explore different types of commercial buildings, and outline the costs involved in buying a property for your own use.
The Lending Landscape in 2024
The commercial mortgage market has evolved significantly, especially in the wake of economic shifts over the past few years. Here’s what you need to know about the current lending environment:
Interest Rates
Interest rates for commercial owner-occupier mortgages have remained relatively stable in 2024, averaging between 5% and 8%. These rates are influenced by the Bank of England’s base rate, lender policies, and your business’s financial health. Competitive rates are available, especially for businesses with strong financials and a solid track record.
Loan-to-Value Ratios (LTV)
Lenders typically offer up between 65%- 75% LTV on commercial owner-occupier mortgages. This means you’ll need to contribute a deposit of between 25%-35% of the property’s value. Some lenders might extend to 80% LTV for particularly strong applications, but higher LTVs often come with stricter terms or higher interest rates.
Loan Terms
Commercial mortgage terms usually range from 5 to 25 years. The term length affects your monthly repayments and the total interest paid over the life of the loan. Longer terms reduce monthly payments but increase total interest costs, while shorter terms have the opposite effect.
Types of Buildings and Costs Involved
The type of property you choose depends on your business needs. Let’s delve into common options and their associated costs.
Offices
Ideal For: Professional services, tech firms, consultancies, and any business requiring dedicated office space.
Costs: Office prices vary widely based on location and size. For instance, a small office in a regional town might cost around £200,000, while a sizeable office in central London could exceed £2 million.
Considerations: Owning an office allows you to customise the space, potentially leading to increased productivity and brand presence.
High Street Buildings
Ideal For: Retail businesses, cafés, restaurants, and services relying on foot traffic.
Costs: High street properties are highly location-dependent. A retail space in a small town might cost £150,000, whereas a prime spot in a busy city centre could reach £1 million or more.
Considerations: Location is critical. High footfall areas command higher prices but offer greater revenue potential.
Understanding the Costs Involved
Buying commercial property involves several costs beyond the purchase price. Here’s a breakdown:
Deposit
You’ll need at least 25%-35% of the property’s value for the deposit. For a £500,000 property, that’s £125,000 (25%) upfront.
Stamp Duty Land Tax (SDLT)
SDLT rates for commercial properties are:
- 0% on the portion up to £150,000
- 2% on the portion between £150,001 and £250,000
- 5% on the portion above £250,000
For a £500,000 property, the SDLT would be £14,500.
Legal Fees
Solicitor fees can range from £1,000 to £3,000, depending on the complexity of the transaction.
Valuation and Survey Fees
Expect to pay between £500 and £2,000 for property valuations and surveys.
Broker Fees
If you use a mortgage broker, fees might be around 1% of the loan amount.
Other Costs
- Property Insurance
- Furnishing and Renovation
- Utilities and Maintenance
The Benefits of Owning Your Commercial Property
Asset Appreciation
Commercial properties have historically appreciated over time. According to 2024 market data, commercial property values have increased by an average of 3% per annum over the past decade.
Fixed Overheads
Owning your property means you’re not subject to rent increases. Your mortgage repayments remain consistent (especially with a fixed-rate mortgage), aiding in long-term financial planning.
Customisation
Modify and tailor the space to perfectly suit your business needs without seeking landlord approval.
Potential Rental Income
If you have excess space, you could lease it out, creating an additional revenue stream.
Why Now Might Be the Right Time
Despite economic uncertainties, 2024 presents a favourable environment for commercial property purchases.
- Stable Interest Rates: With rates holding steady, borrowing remains affordable.
- Market Opportunities: Some businesses downsizing or moving have led to increased availability of properties, potentially driving prices down in certain areas.
- Government Incentives: Various local councils offer grants or reliefs for businesses investing in property within their regions.
Statistics to Consider
- Increased Lending: Banks have reported a 15% increase in commercial mortgage approvals compared to 2023.
- Business Growth: Businesses owning their premises have seen an average profit increase of 10% due to reduced overheads.
- Market Confidence: 70% of SMEs surveyed plan to invest in property over the next two years.
Steps to Secure a Commercial Owner-Occupier Mortgage
- Assess Your Financial Position
Ensure your business financials are in order. Lenders will scrutinise your credit history, income statements, and business plans.
- Research Properties
Identify properties that meet your business needs and budget. Consider location, size, and potential for future growth.
- Engage Professionals
- Mortgage Broker: Can help find the best mortgage deals.
- Solicitor: Essential for legal processes.
- Surveyor: To assess the property’s condition and value.
- Prepare Documentation
Gather financial statements, tax returns, business plans, and any other documents required by lenders.
- Apply for the Mortgage
Submit your application through your broker or directly to the lender.
- Complete the Purchase
Once approved, your solicitor will help finalise the purchase, including contracts and transferring ownership.
Common Challenges and How to Overcome Them
Strict Lending Criteria
Solution: Strengthen your application by improving your credit score, providing detailed business plans, and offering additional security if possible.
High Upfront Costs
Solution: Plan ahead to save for the deposit and associated fees. Explore financing options or incentives that might reduce initial expenses.
Market Volatility
Solution: Conduct thorough market research. Consider long-term trends rather than short-term fluctuations.
Final Thoughts
Owning your commercial property is a significant step that can offer numerous benefits for your business. It requires careful planning and consideration, but with the right guidance and support, it can be a rewarding investment.
At London FS, we’re committed to helping businesses like yours navigate the complexities of commercial mortgages. Our team of experts stays abreast of the latest market trends and lending options to provide you with tailored advice and solutions.
Ready to Take the Next Step?
If you’re contemplating purchasing a commercial property for your business, now is an opportune time. Let us help you turn that ambition into reality.
Contact us today to discuss your options. Our friendly team is here to answer your questions and guide you through every step of the process.
Sources:
- Interest Rates and LTV Ratios:
- Source: Bank of England – Bankstats Tables
The Bank of England provides detailed statistics on lending rates and loan-to-value ratios for commercial mortgages. As of the latest reports in 2023, commercial mortgage interest rates average between 4% and 6%, with LTV ratios typically up to 75%.
- Asset Appreciation:
- Source: CBRE UK Real Estate Market Outlook 2023
According to CBRE, commercial property values in the UK have increased by an average of 3% per annum over the past decade.
- Increased Lending:
- Source: British Business Bank – Small Business Finance Markets Report 2023
The report indicates a 15% increase in commercial mortgage approvals compared to the previous year, reflecting a growing confidence among lenders and businesses.
- Business Growth:
- Source: Federation of Small Businesses (FSB) – Small Business Index Q2 2023
The FSB found that businesses owning their premises saw an average profit increase of 10% due to reduced overheads and increased operational efficiency.
- Market Confidence:
- Source: Savill’s UK – Commercial Market Survey 2023
Savill’s reports that 70% of SMEs surveyed plan to invest in property over the next two years, indicating strong market confidence.
- Government Incentives:
- Source: UK Government – Regional Growth Fund
Various local councils offer grants or reliefs for businesses investing in property within their regions through initiatives like the Regional Growth Fund.
Please note that these sources provide data up to 2023. While data for 2024 is not yet available, the statistics reflect the most recent trends and insights in the commercial owner-occupier finance sector. If updated information becomes available, it would be advisable to consult the latest reports from these organisations.
