What is a commercial mortgage?
It’s a secured loan on non-residential property. It can be a mortgage for buy-to-lets, a loan to develop new housing or to purchase a warehouse, office, or shop.
Types of mortgages
- Commercial mortgages can be divided into two classes
- Owner-occupier
- This is to buy a property as your trading premises
- Commercial investment mortgage
- This is to buy a property to let out
When is it worth taking one?
If you are looking to expand your business, then taking out a mortgage to buy rather than rent your premises is a good investment. It protects you against rent rises and gives you the chance to borrow more when the value of your building rises.
What are the benefits?
- There are many positive reasons for taking out a commercial mortgage:
- Releasing capital for the growth or investment of the business
- Expanding trading
- Buying new equipment
- Saving on paying rent
- Sub-letting or releasing part of the property to generate extra income
- Consolidating debt
What are the key features of a commercial mortgage?
Loan terms can vary from five to 40 years, although generally, they are up to 25 years
Interest rates are higher than residential mortgages but lower than a business loan
Fixed rates can be set up, often for up to five years
You usually need a deposit of at least 30 percent
What size businesses are most common in the UK?
Graphic of head/pawns Mintel research, April 2019
What you should consider?
This is a big financial commitment so it’s important you know what you want and what your lender expects.
Can you afford the monthly payments and the deposit?
Personal guarantees may be needed if your business is new
Credit ratings will affect the level of interest you pay
A broker can help you get the deal that works for you
How do I apply?
Consider employing a commercial broker who can source the right lender for you and deal with the application
- Fill in an asset and liability form
- Complete the commercial application form
- Supply key details about your business
- Valuation of the property
- Lenders’ solicitors conduct due diligence
- Successful applicants receive an offer from the lender
What paperwork do you need?
- Proof of identity
- Profiles of all the directors and partners
- Financial projections and a business plan
- Three years of accounts or tax returns
- Bank statements
- Asset and liability statements
- Lease and or tenancy agreements
What do you pay?
Typically, commercial mortgages are on a variable rate linked to the Bank of England base rate or LIBOR. However, fixed mortgages are available for sums below half a million pounds giving you the benefit of knowing exactly what your payments will be.
The rates are not pre-set as in residential mortgages so what you pay depends on your businesses’ risk profile.
Eligibility and criteria
You will need to pass the lenders’ eligibility checks to qualify for a commercial mortgage.
- Cash flow and any debts you owe to gauge the financial health of your business
- Projected income to see if you can cover the cost of borrowing
- Your ability to pay the deposit
- Rental income may also be considered as this affects the business’ cash flow
- General income, credit, and assets
What fees are involved?
- Arrangement fees
Generally, these are added after a mortgage approval, although some lenders may ask for this upfront to cover the work involved if you don’t accept their offer. - Valuation fees
A surveyor will visit the property and write a valuation for the lender. Generally, commercial valuations for simple cases are £500 and this is paid to the lender after you have accepted their initial indicative mortgage offer. - Legal fees
You need to pay both your own legal fees as well as the lender’s which usually start at about £500 for each party. - Broker fees
Brokers give you tailormade advice based on your situation and present your case to the lender. Their fee is usually 1% of the amount borrowed.
Other options
If a commercial mortgage isn’t right for you there are other alternatives.
Secured finance for filling the gap between a debt falling due and the mainline of credit becoming available. It’s often useful if there’s a break in the chain for selling a property, for financing a house bought at auction or for light refurbishment.
Short-term loans
This type of finance is over a defined period from a few months to up to a year with a fixed interest rate. It works in a similar fashion to a personal loan and is usually unsecured.
Borrowing this way enables you to buy a site to build new homes or convert existing properties. The amount lent usually relates to the gross development value of the project – what the property or refurbishment is worth once you’ve finished the work.
Shop around
Using a broker saves time and is a good way to ensure successful borrowing. Hank Zarihs Associates has a track record of sourcing tailormade funding at favorable terms even if you have been rejected before. The brokerage draws from a panel of 60 lenders including private banks, finance houses, and foreign investors to find the best possible deal.
The lowdown on commercial mortgages
There’s a lot to think about before deciding if a commercial mortgage will work for you. However, if you want to grow your business or buy your premises then it’s worth considering.
This guide weighs up the pros and cons and gives you a no-nonsense insight into this type of borrowing. Commercial mortgages have a range of benefits. They are usually a cheaper way of borrowing than an unsecured business loan. If you use them to buy your offices or warehouse then you have the benefit of guarding yourself against future rent rises. Or you may wish to take out a commercial mortgage to upscale the offices or shop you already own.
Either way, this guide will help you make the right choice. It also advises you on how to go about getting this type of mortgage as well as outlining other types of finance you could consider.
We hope this guide will point you in the right direction and show you all the possible options for helping your business expand. If you have already applied for a commercial mortgage, or other types of finance, and been turned down don’t lose heart as lenders vary in their eligibility criteria. This is where an experienced broker can help target the right lender and ensure the application hits the mark.
We hope this guide shows you what the options are, the benefits of this type of lending, and how to go about applying for a commercial mortgage in the best possible way.
