“Rising rental costs means the stability of mortgage repayments could in fact make budgeting and financial planning easier for the borrower in the long-term.”

It has been a tough couple of years for the UK’s small business sector. The effects of the Covid pandemic, global inflation, supply chain issues and labour shortages have all taken their toll on profit margins, forcing some companies to close their doors while others have sat back and reassessed their business models as they wait for the storm to pass.

Yet more than three years on from the start of the Covid pandemic, things are starting to look brighter. While there is still some level of uncertainty in both the UK housing and mortgage markets, there are definitely signs that things are starting to improve. Inflation is falling, the cost of goods is starting to drop and a growing number of small businesses are starting to turn a profit and see demand for their services beginning to increase.

With trading accounts seemingly back in order and businesses now starting to recover from the losses incurred over the last couple of years, Norton Broker Services has started to see an uptick in enquiries from clients looking to scale up and invest in their business by taking out an owner-occupied commercial mortgage to purchase a commercial property.

There are a number of reasons driving this demand, including the fact that higher rental costs mean it may now be more cost-effective for some of these business owners to buy a property rather than to continue to rent. While for others, the challenges of the last few years may have increased the drive to invest in and grow the business and achieve greater economies of scale.

According to figures from an American Express and Small Business Saturday UK report released in July, 79% of small business owners expect to grow their business over the next 12 months, despite tougher market conditions. A significant proportion of these are proactively seeking to drive growth by investing in sales and marketing activity (30%), diversifying their product offering (25%) and investing in new technology (20%).

For some, this could also mean investing in new business premises, which is where brokers can play an important role. There are a number of reasons why your client may consider an owner-occupied commercial mortgage, including to purchase a shop for a retail business, to buy a garage and create a mechanic workshop, or invest in office premises for a growing business.

Perhaps your client is looking to expand their business and has decided now is the time to invest in commercial premises because their current property is no longer adequate for their business needs. Perhaps they are currently renting a space and would save money in the long-term by owning a property and benefiting from financial incentives such as property appreciation as well as any eligible tax deductions.

It is important to remember that any property purchased using an owner-occupied commercial mortgage can only be used for the client’s own business operations and cannot be rented out to tenants. The deposit required can also be higher than on a standard residential mortgage, often ranging between 25% and 40% of the property’s value, so borrowers would need to ensure they have the capital to invest.

Although the interest rates on commercial loans are also often higher than on residential mortgages and would need to be factored into any affordability assessment to ensure the business owner can meet the monthly repayments, rising rental costs means the stability of mortgage repayments could in fact make budgeting and financial planning easier for the borrower in the long-term.

As with all mortgage products, taking out an owner-occupied commercial mortgage will not be a suitable solution for every business owner, but for those clients who do meet the criterion, owning a business property could prove to be a valuable asset and provide security and stability in the long term.