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Thursday 29 September 2016
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Commercial mortgages

If you're planning any major changes to your practice such as extending the property, investing in new equipment or even buying or building new premises, then you'll probably need to find an injection of capital to fund the project. It's an ambitious and exciting move but the prospect of securing the capital may seem a daunting responsibility.

Your first port of call could be your PCT to check whether you're able to secure any financial support from them. However, if funding isn't available, you'll need to look to external sources. This article will focus on the option of taking a commercial mortgage and outline some of the key areas you need to consider when thinking about committing to this type of loan.

Cash Flow
Signing up for a commercial mortgage is a big commitment, so one of the first things you need to consider is whether there are sufficient funds coming into the practice to continue operating as normal, while committing to the additional costs of a mortgage.

Finding a lender
You won't find the same range of offers on commercial mortgages that you see for residential mortgages. Generally, you'll come across a variable or fixed-rate deal. You need to do your research and you may want to take advice from a financial services provider who has an indepth understanding of how GP practices operate.

Fees
As with residential mortgages, you will have to pay both a valuation and administration fee. However, for commercial mortgages, the valuation fee may be higher because a specialist surveyor will be required. The administration fee will usually be a percentage of the loan value. Some lenders will also expect you to pay their solicitors' costs as well as your own so it's advisable to check this upfront and get an indicative fee.

Prepare your case
When dealing with the lender you will need to present the business case behind your application. This will mean preparing information such as:

  • How much you want to borrow.
  • What is the value of the property that you are securing against.
  • Clarity over why you want to borrow that level of finance – what will you do with it?
  • The overall value of the business you are investing in. This should include the intangible as well as the tangible factors, for example if you're investing in new equipment you may be able to show how this will help the GPs to see more patients, more quickly and thereby improving the efficiency of the practice.
  • Proof that you're able to pay the loan back – for example, your accounts will show how much cash is coming in and what your current expenditure is. 
  • Projections and future business plans.

LIBOR
The lender will determine their offer based on the information you provide. You need to bear in mind that they may quote against LIBOR (London Interbank Offered Rate) rather than the Bank of England Base Rate you'll be used to seeing for residential offers.

LIBOR is the rate at which banks lend to each other and it's a truer reflection of the cost of funding for banks. Further information about this is available on www.bbalibor.com

Tax efficiencies vs risk
When borrowing money you will have the option to go for an interest only or a capital repayment mortgage. With both of these loans you'll be able to claim a deduction against tax for interest paid on borrowings for business purposes. However, each option has its own tax efficiencies and risks.

With a capital repayment mortgage, you will be paying off the interest on the loan as well as some of the total mortgage value. Over time, the total capital will reduce and therefore the amount of interest you're being charged and paying back will also decrease. This means that the level of tax benefits you can claim will shrink during the mortgage term – however, you are guaranteed to pay back the loan in full. 

On an interest-only mortgage, you will only be making payments to pay off the interest. This means your overall outstanding capital won't reduce over time so the amount of interest you're paying will remain the same. You can therefore continue to gain the same level of tax benefits throughout the mortgage term. The risk of this, however, is that your loan will remain unpaid and so you'll need to make alternative arrangements to ensure you clear the balance of the mortgage by the end of the term.

It's advisable to seek expert financial advice to ensure you understand the benefits and risks involved and make the right decision.

Negotiations
You don't necessarily have to accept the first offer from the lender as there is room for negotiation. For example, you may want to increase the administration fees to reduce the interest rate or you could ask for a longer-term loan if that suits you better. Before you sign, look closely at the details and discuss the offer with your financial adviser to ensure that it is right and suitable for your practice.

Protection
In conjunction with getting the mortgage deal finalised, you should also think about how you're going to cover the repayments in the event of death, injury or illness of a key income earner within the practice. Some providers will actually make it a condition that you have life insurance in place before they agree the mortgage.

You should also review other associated insurance policies, such as your surgery insurance and professional expenses policies, to make certain you are appropriately covered.

There's clearly a lot to think about if you're going to apply for a commercial mortgage. While there is plenty of information available, it's crucial you seek expert advice from someone who understands the way a GP practice works to be able to recommend the right solutions and offers to meet your needs.

The above information doesn't constitute financial advice and the suitability of any mortgage depends on your personal circumstances.