An introduction to commercial mortgages
What is a commercial mortgage?
A commercial mortgage is a loan used to purchase a property for a business premises. Although similar in concept, there are differences between a residential and commercial mortgage and the requirements for a successful application.
A commercial mortgage can be used to borrow over £25,000 to buy or invest in a business premises, but additionally to refurbish or develop a commercial property. It can even be used to buy vehicles, machinery or equipment.
Commercial mortgages are a bespoke, specialist finance product and it is tricky to compare rates online. This, combined with a tightened lending market, mean that working with a commercial finance broker can help to secure a commercial mortgage more quickly and easily.
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How do commercial mortgages work?
There are two main types of commercial mortgage:
Owner-occupier mortgagees are used to buy a property that will be used as a place for your own business to operate.
Commercial investment or buy-to-let mortgages are a type of borrowing for a property which you plan to rent out to another business.
Typically taken over a period from one to 25 years, most lenders will require a minimum 25 per cent deposit, offering a 75 per cent loan to value (LTV). For example, a building with a purchase price of £100,000 would require a deposit of £25,000. In addition, a lender will want to know the potential rental income of a commercial premises if it is being purchased as an investment. Some lenders will offer a 100 per cent commercial mortgage, but these will incur higher interest rates and require additional security.
Commercial mortgages are typically charged as a percentage over base of LIBOR, and will usually be higher than for a residential mortgage. However, rates are ordinarily less than that of a traditional business loan. Many lenders will also offer a fixed rate commercial mortgage for a period of two to five years.
What are the advantages of a commercial mortgage?
Although more expensive than a residential mortgage, the interest charged on a commercial mortgage is currently tax deductible. Investment in a business premises can provide a source of rental income and additionally has the potential to grow in value which can provide a nest egg for the business over the long-term.
Some commercial mortgages will enable you to switch between a fixed and variable rate, and even provide a payment holiday.
Looking for a flexible commercial mortgage?
How do I apply for a commercial mortgage?
There are a number of specialist lenders offering commercial mortgages and working with a commercial finance broker such as Complete Commercial Finance can be valuable in helping you to navigate the market and find the best lender to suit your individual circumstances.
The process for applying for a commercial mortgage is similar to a residential mortgage and will require bank statements for two to three months, three years’ audited or certified accounts, along with ID and any lease or tenancy agreements. In some instances, you may need to submit a business plan to demonstrate how the mortgage will be repaid, but your business finance broker can advise on this.
Just as for a residential mortgage, once the application has been submitted the property will be valued and the legal process will be undertaken by the lender’s solicitors.
What charges apply to a commercial mortgage?
A commercial mortgage may be subject to an arrangement fee, typically 1-2% of the loan value up to £1m, and a broker fee in the same region. Additionally, a valuation is required and this will cost from £500, although this will be provided as a quotation before it is undertaken. You will need to pay both your own and the lender’s legal fees which start at around £500 for each party. Finally, if you repay the loan early, charges may apply.
Can I apply for a commercial mortgage with a bad credit rating?
Lenders will have a risk profile that they use to determine if an applicant is suitable for a commercial mortgage – if your circumstances fall outside this risk profile they will be refused. Even if you have a bad credit rating, it may be possible to apply for a commercial mortgage as the property itself will provide collateral in the event that you are unable to afford your repayments. However, if you have a bad credit rating you may pay a higher interest rate and/or be required to provide a personal guarantee. Working with a commercial finance broker such as Complete Commercial Finance can help you to find and secure the best LTV commercial mortgage for your individual circumstances.
