Over recent months we have seen a large number of funding requirements for businesses looking to purchase their premises and thought it would be useful to look at the pros & cons of renting or buying. Given that commercial property values appear to have stabilised in value following their correction since 2008 and market commentators giving positive noises for the immediate future, perhaps now is the time to consider buying?

The current low level interest rates are an added reason although rates appear set to increase within the next 12 to 18 months. To be able to purchase there will be a deposit requirement of between 20% & 30%, depending on the overall background to the request. If this is not immediately available within the business or from its stakeholders, it may be possible for the deposit to be borrowed from a non bank source at reasonable rates on an unsecured basis; we would be pleased to discuss this in more detail. Subject to the above deposit being available the comparison needs to be made between the borrowing costs versus rental cost. As an example a tenant currently paying £25,000 pa in rent may have the option of purchasing their premises for £250,000.

• 30% deposit £75,000
• 70% borrowed £175,000
• Repayment term 15 years
• Estimated interest rate 3.25% over base rate
• Monthly repayments £1,272 (capital & interest)

The annual cost of mortgage repayments at current rates would be £15,264 compared to the annual rental cost of £25,000. Future interest rate movements could be protected by entering into a fixed rate; 10 years fixed rate would be 5.9%, £1,476 pm over 15 years repayment term with the rate fixed for the first 10 years and then reversion to a base rate. If fixed for the full 15 years the rate is 6.04% and repayments £1,480.

As the above illustrates, future interest rate increases can be protected and the monthly repayment cost of a 15 year fixed rate loan can be substantially lower than rental payments. However, if a fixed rate is broken before the end of the agreed fixed rate period, breakage costs may apply so should only be used when it is known the premises are required for at least the length of the term of the fixed rate. Consideration should also be given to purchasing business premises through the most appropriate entity and need not be in the business name. Income received on property owned by a pension scheme is free of tax and the ultimate sale is subject to lower capital gains tax.

In summary, given the current low-level interest rates, ability to enter into fixed rates for long periods and the current value of the commercial property we believe now is a good time to buy. To do so there is the need to demonstrate proven repayment to a lender so financial accounts for the business are required for ideally three years but certainly two years.

We would be pleased to discuss any of the above in more detail with either you or your client