Buying vs renting: why you should never assume you won’t get a commercial mortgage

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    Updated: February 9, 2023 at 10:09 am

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      AUTHOR: Chris Richards, Commercial Finance Manager at Swoop

      Before you write off the idea of buying your premises, make sure you’ve done the sums: you may be surprised by what is within your reach

      Are you renting your business premises? How would you like to cut your rental costs in half in five years time?

      If you’ve always thought that buying your property is out of reach, a little careful planning could make it time to review those assumptions.

      Why do we say this?

      Outside the south east of England, most tenants typically pay around 10 percent of the capital value of the building they occupy in passing rent. In short, if you have been renting the same premises for 10 years, you have given your landlord the value of the property and have nothing to show for it yourself.

      Are you a good candidate for secured bank leverage? Lenders will want to know:

      • Your company financial track record
      • Positive net worth
      • Liquidity ratio

      For example, if the capital requirement is £500,000 and a business holds £50,000 this reduces the leverage requirement to £450,000.

      A typical commercial mortgage is capped at 70 percent LTV – so in this example, £350,000. This leaves a £100,000 deficit. 

      This £100,000 could be funded by an unsecured business loan over say a 5 year period. Suddenly, property ownership feels a lot closer.   

      What will it cost? Crunching the numbers

      You need to balance the costs of this plan with what you will gain. It helps to think of the current passing rent to be the equivalent of paying interest on a loan, in that it is a sunk cost of operating from the premises.

      Whilst the interest rate could rise, if not fixed, the passing rent is typically under review at set periods and could potentially rise in line with RPI. 

      The typical interest rate on a commercial mortgage would be around 3.50% ABR – 4.75% payrate:

      • £350,000 x 4.75% = £16,625 pa
      • Capital and interest repayments over 25 years = £24,000 pa 

      The typical rate on an unsecured business loan facility would be 10%:

      • £100,000 x 10% = £10,000 pa
      • Capital & Interest Repayments over 5 years = £25,000

      Whilst capital repayments would also have to be serviced this cannot be factored into the rationale of Buy v Rent on a profit and loss (P+L) basis.

      The equivalent rent is the interest – which is nearly half the cost – and this reduces year-on-year as the balance reduces!

      The total cost of servicing interest and capital reductions is broadly similar to the current passing rent in years one to five; it then reduces down by 50 percent once the unsecured business loan is repaid at the end of year five. 

      What’s the outcome?

      Act now and in five years, you could be paying about half of what you are currently paying for your premises. Not only that, you are also building up a significant asset for your business. 

      If this sounds like something you would like to pursue, get in touch with the commercial mortgages team at Swoop.

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