If you take out a loan on a property that isn’t where you live, it’s known as a commercial mortgage. There are many different types of commercial mortgages, including buy-to-let mortgages which are commercial products created to be sold in higher volumes.
Commercial mortgages aren’t exactly the same as a regular mortgage and there are different factors to be aware of. This guide examines the ins and outs of commercial mortgages and provides all the essential information you need to know.
When to use a commercial mortgage?
Business loans and commercial mortgages are similar but related products, with the latter taking over where the former finishes. Business loans typically go up to £50,000 and are issued on an unsecured basis. Where the amounts being borrowed are larger, lenders will normally want a bit more security which is where commercial mortgages come in.
A commercial mortgage, also known as a business mortgage is usually available over 3-25 years and up to the value of 70-75%.
If you’re looking to borrow money for an investment property you plan on renting out, the amount lenders will offer will be based on the income generated. Commercial investment mortgages typically won’t go beyond 65% of the purchase price, regardless of the rental income you’re predicting to generate.
For the purchase of a business which includes stock, goodwill etc among its assets, the amount available to borrow will reduce further.
The basics of a business mortgage
A business mortgage has some key differences which set it apart from a regular mortgage, namely:
- The interest rate is higher as commercial mortgages are considered to be high-risk
- The interest rate on a business mortgage is better than on a business loan as security against the debt is being offered.
Why take out a commercial mortgage?
Although there are some factors which may make a commercial sound unattractive, there are still many good reasons to consider one. These include:
- The interest on a business mortgage is tax-deductible
- Your capital will increase in line with the value of the property
- With a business mortgage you can rent out the property to earn extra income (this isn’t possible with a regular mortgage).
Applying for a commercial mortgage
There are many different lenders on the market and it can be difficult to know which one best suits your needs. Going to a broker who specialising in commercial mortgages can help you to find the product which meets your requirements the most closely. A broker will also make the process much easier and be able to explain each step to you.
Although they are very different, a commercial mortgage and a regular mortgage have a very similar application process. As a general guide, these are the steps you can expect to follow:
- Complete the Asset and Liability form; this can normally be filled in and submitted online
- You will be asked to fill in a full commercial mortgage application
- As part of the process you will need to supply information about your business (see more about this below)
- The property you want to purchase is valued
- Due diligence will be carried out by the solicitors acting for the lender
- If the purchase passes all of the above steps without any hiccups, you’ll receive a mortgage offer from the lender.
As part of this application process, you’ll need to be able to supply supporting documentation. To expedite matters, it’s a good idea to gather these together right from the start. You can expect to need the following:
- Bank statements covering the past three months
- Trading figures, including profit and loss, for the past three years
- Proof of your identity and address
- Tenancy and/or lease agreements
- A business plan/financial projections
Not every lender will ask for the final item on the list but it’s becoming increasingly common. This is because understanding how you expect the business to perform allows the lender to judge whether you can realistically afford to pay off the loan going forward.
What to consider
A commercial mortgage is a particularly complex financial product, so receiving advice on each aspect can be very beneficial. When deciding whether to apply for a business mortgage, make sure you are absolutely certain you can afford the repayments both now and in the future. Some of the points you may want to factor in include:
- A bad credit rating won’t prevent you from being able to apply for a commercial mortgage. Bear in mind however that you’re unlikely to qualify for the best rates and will probably be charged a much higher rate of interest to mitigate the risk the lenders believe they are taking
- Just like regular mortgages, a business mortgage is a type of secured loan which means there are very serious consequences to falling behind. If you end up defaulting on your payments, there’s a very good chance you’ll lose the property entirely.
- As described higher up, it’s common for commercial mortgages to require a large deposit with a much lower loan-to-value ratio (LTV). If you’re stretching yourself financially to pay the deposit, make sure you have sufficient capacity left to meet the repayments.
- If you are finding the deposit requirements hard to meet, a broker may be able to find you a lender willing to offer a higher LTV.
- The longer you have been trading, the easier it may be to secure a business mortgage. If your business is relatively new, the lender may require personal guarantees as you’ve not demonstrated sustained success.
Choosing a commercial mortgage
Broadly speaking, a commercial mortgage can be divided into two different groups: owner-occupier mortgages and commercial investment mortgages.
An owner-occupier mortgage is a type of secured loan which is used to purchase property that will be used as your business trading premises.
By contrast, a commercial investment mortgage is used for property that you’re planning on renting to someone else.
Paying interest on a commercial mortgage
As we said earlier, fixed rate mortgages aren’t widely available so you can expect to have to pay a variable rate. When you’re comparing what’s being offered, you’ll probably see it described as a certain percentage over the base rate or LIBOR. This is what is known as a tracker mortgage when offered as a normal residential mortgage. If you’re borrowing less than £500,000 you may be lucky enough to find a fixed rate mortgage. These are highly desirable as it means the lender bears the risk of any rate change.
The assessment for commercial mortgages is different to personal loans. Lenders will usually have a defined risk profile that they’re willing to consider, and if you don’t fall somewhere within it you’ll be declined outright.
Understanding the fees
There are a range of fees which could apply to your mortgage:
- Arrangement fees: these are the type of fees which are added to the mortgage after it’s been approved. Be prepared for the fact that some lenders may request it sooner to safeguard against their offer being turned down. For loans with a value of up to £1 million, arrangement fees are usually 1-2% of the loan value.
- Valuation fees: these are fairly straightforward and cover the cost of a valuer visiting the property and writing a report. For commercial mortgages you can expect to pay approximately £500 for a simple valuation but it can be much higher in some cases. This is payable to the lender once you accept their offer.
- Legal fees: you’ll have to pay your own legal fees plus the legal fees of the lender. It’s normally around £500 for each side.
- Broker fees: for their help and expert advice throughout the mortgage application, a broker charges a fee. This will normally be up to 1% of the value of the loan.
Loan eligibility and lending criteria
Every lender will have their own lending criteria which you’ll need to fulfil to get offered a commercial mortgage. The checks they carry out could include:
- Your debts and the cash flow; this enables them to ascertain how financially healthy the business is
- The projected income
- Whether you are able to meet the requirements for the deposit
- How much rental income you will receive
- Your assets, credit and general income
If a commercial mortgage isn’t right for you, there are other option you can consider such as:
- Bridging loans: these can help with a property purchase if you need to sell an existing property first
- Short-term loans: if you need access to funds but don’t want to make a long-term financial commitment, this could be the solution. This could be used to cover cash flow, working capital and other types of expenditure
- Unsecured Business loan: there are lenders now offering unsecured business loan up to £350,000 rates are subject to underwriting anything from 1.9% – 22%.
Comparing business mortgages
If you’re looking for a commercial mortgage with the best LTV ratio, get in touch with Revolution Finance Brokers. Revolution Finance Brokers are members of NACFB