Taking out a business mortgage: when is that a smart move?
One of the largest fixed costs that a large part of all entrepreneurs has to deal with is the rent of commercial premises or office space. The reason that relatively many entrepreneurs still rent business premises instead of buying them, is that buying such a property naturally entails responsibilities and obligations for a longer term, and therefore also uncertainties. Nevertheless, the purchase of a commercial property can offer considerable advantages; that's why there are corporate mortgages. But when is it smart to take out such a mortgage?
What is a business mortgage?
The name says it all: a business mortgage is a business loan to purchase or renovate a business property. The principle is very similar to the private loan, although there are some differences. Business mortgages are offered by banks that provide business services.
Commercial mortgages often do not cover the full purchase value of a commercial property, but about seventy percent. In practice, therefore, you often supplement the business mortgage with your own money, or possibly with money from a business loan.
Unknown to many entrepreneurs
Relatively few entrepreneurs in the Netherlands use commercial mortgages. This is partly due to the 'rental culture' in many business sectors. You see a relatively large number of companies in the Netherlands that continue to rent their business space for years, despite the fact that the purchase of the building (or another building) would be financially more advantageous.
Flexibility – a lease can be dissolved more easily than a mortgage, should things go wrong or the company is closed – is considered more important than financial benefit. However, that is not always a rational decision. After all, you have become an entrepreneur because you want to earn your own living. Then it makes sense to keep your necessary costs down as much as possible.
Differences with private mortgages
The commercial mortgage is similar to the 'normal' mortgage, but has some important differences. First, there is less government interference in corporate mortgages. This means that you cannot claim things such as mortgage interest deduction or mortgage guarantee. The risks are therefore slightly greater on the side of both the buyer and the provider of the mortgage, which is reflected in a somewhat higher interest rate (often one percentage point) than for private mortgages. Commercial mortgages are also repaid faster (often within twenty years) than private mortgages and there are usually more options for making additional interim repayments without penalty.
When should you consider a business mortgage?
It becomes a business mortgage to consider worth once your company has been stable for a while (at least twelve months). When applying for such a mortgage, you will always have to demonstrate that your company is financially healthy and stable. You can use such a mortgage for three purposes:
- Buy the business space that you are now renting;
- Buying or realizing a new business space;
- Renovate or expand your current business space.
The third option in particular is not always known to entrepreneurs.
Especially when you now have a lot of costs to rent a commercial property, considering the purchase of a property by means of a commercial mortgage is extremely interesting (which is also called a commercial pawn mortgage mentioned). You have to realize that you are making a long-term commitment, so you have to be relatively certain that you want to remain an entrepreneur in the future. It is often possible to pay off or transfer a commercial mortgage in full early, but the remaining interest must then be paid, so it can be a costly affair.
The advantages and disadvantages of a commercial mortgage
If your company can bear the financial obligation of a mortgage, there are several advantages. Not only do you save on rental costs – which are often much higher than the mortgage repayment – but you also invest in a property that is likely to increase in value. This makes taking out a commercial mortgage not only a cost-saving move, but also a smart investment.
What you have to realize is that as the owner of a commercial property you will have to deal with some extra costs, such as the property tax, maintenance costs and necessary insurance.
Finally, there is one exceptional situation in which a commercial mortgage can also be valuable: if you already own commercial space that has been partially or completely repaid, you can take out a commercial mortgage to convert the value of your property into cash. This way you can use the freed up money to invest in your business, instead of having it stuck in stone. This allows you to grow your business faster and you do not have to take out a business loan.
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