The Pros And Cons Of Adding Fees To The Amount Borrowed
If you are considering borrowing money on behalf of your business by way of the likes of a commercial mortgage then the lender will charge a range of fees that may include such things as an application fee, arrangement fee, valuation fee and legal fees. With some lenders, it may be possible to add one or more of the later three fees mentioned to the amount that you wish to borrow.
However, what are the pros and cons of doing this?
Commercial mortgages are often for sizeable amounts sometimes running into many millions of pounds. So, for instance, if you wished to borrow say £5 million to go towards the funding of the purchase of new commercial premises and the arrangement fee was let’s assume 1% that means that there is an arrangement fee potentially payable of £50,000 unless you are able to negotiate a lower fee.
We are sure that you will agree that is a sizeable sum and you may prefer not to have to commit that sort of money up front which could perhaps be better put to use elsewhere in the business. For instance, you mat wish to buy additional stock that can be turned around and sold quickly for a reasonable profit. You may wish to use the £50,000 for an additional marketing campaign to obtain further new business.
So, by adding the arrangement fee to the amount of the borrowing, you could have the £50,000 that had been set aside to cover the arrangement fee available to be used effectively elsewhere by the business.
The downside in adding the £50,000 used in the above example to the commercial mortgage of £5 million is that you will also have to pay interest on the £50,000 that, over a number of years, could add up to a sizeable sum.
Let’s assume that you have borrowed the £5 million on a capital and interest repayment basis at a rate of say 2.5% over base rate which is currently 0.5% making a total of 3% per annum and that base rate does not change during the 10 year term of the commercial mortgage.
The addition of £50,000 at 3% pa over 10 years means that you would pay approximately £483 extra per month than you would have done had you merely borrowed the £5 million. The interest that you would pay on that £50,000 over the 10 years would amount to approximately £7,932.
So, as you can see, there is both for and against adding an arrangement fee to the amount borrowed on a commercial mortgage. Ultimately, that decision has to be yours assuming that the lender is agreeable to you doing so.