When are commercial mortgages used??
Commercial mortgages are often considered a better option than simple business loans. Business loans of about £25,000 are often unsecured but when it comes to bigger amounts, lenders require security to reduce the financial risk.
Business mortgages can last up to 25 years with a 70-75% mortgage. This loan-to-value ratio is to check how much you can borrow related to how much the property is worth. If you are looking at an investment, the amount will essentially be determined by the rental income that is generated by the investment but never above 65% of the purchase price.
What are the key features of a commercial mortgage??
A commercial mortgage, which is used to finance the purchase or refinance of commercial real estate, has several key features that differentiate it from residential mortgages:
- Loan Amount:
- Typically higher than residential mortgages due to the higher value of commercial properties.
- Can range from a few hundred thousand to several million pounds.
- Loan Term:
- Generally shorter than residential mortgages.
- Common terms are 5, 7, 10, 15, or 20 years, with longer amortization periods possible.
- Interest Rates:
- Can be fixed or variable.
- Variable rates fluctuate based on market conditions and are often tied to an index like the Prime Rate or LIBOR.
- Loan-to-Value Ratio (LTV):
- The ratio of the loan amount to the appraised value of the property.
- Lower LTVs (60-80%) are common, meaning borrowers need to contribute more equity.
- Lenders often require a DSCR of 1.2 or higher.
- Types of Properties:
- Can finance various property types, including office buildings, retail spaces, industrial properties, multi-family units, and mixed-use developments.
Understanding these key features helps borrowers navigate the commercial mortgage process and choose the best financing options for their commercial real estate investments.
What are the pros and cons of commercial mortgages??
Commercial mortgages offer businesses and investors the opportunity to finance the purchase, refinance, or development of commercial real estate properties. These mortgages come with distinct advantages and disadvantages that can significantly impact the financial health and strategic decisions of the borrower. Understanding the pros and cons of commercial mortgages is crucial for making informed decisions, whether you're looking to expand your business operations, invest in income-generating properties, or secure long-term financing for commercial projects.
Pros
- Tax-deductible interest
- The capital can increase if your property increases in value
- Ability to rent out the property and earn extra income
Cons
- A bigger deposit is often required upwards of 30%
- Multiple fees are attached to the mortgage
- The process can be lengthy
What fees will I pay on a business property mortgage??
When obtaining a business property mortgage, borrowers should be prepared for various fees that can significantly impact the overall cost of the loan. These fees are typically associated with the application, processing, and closing stages of the mortgage and are essential to cover the lender's costs and mitigate risks. Understanding the range and purpose of these fees is crucial for accurate financial planning and ensuring that the total cost of financing aligns with your business's budget and investment strategy.
Arrangement fees
Arrangement fees are added to the loan amount once the loan is approved. Some lenders tend to request these fees earlier in the process as a cover for their work in case the offer is not accepted by the business owners. These fees can vary from 1%-2% of the loan amount to £1 million.
Arrangement fees are typically added to the loan after the loan is approved. However, some lenders may request the arrangement fees earlier to cover their work if you don't accept their offer. Arrangement fees are usually 1% -2% of the loan amount for loans up to £1 million.
Valuation Fees
Valuation fees are paid after the valuer visits the property and establishes the true value of the property. These valuations start at around £500 and the costs are calculated individually.
Legal Fees
Legal fees are often paid twice since as a business owner, you will have to pay your own but also the lender’s fees which can start from £500.
Broker fees
Broker fees are paid to the brokers that advise you through your mortgaging process and their services are often 1% of the loan value.
How is interest paid on a commercial mortgage??
Commercial mortgages are usually paid with a variable rate of X% of the LIBOR base. Fixed-rate mortgages are only available for under £500,000 with the lender taking the risk. The rates however are not determined from the offset since lenders have a high risk profile.
How do you choose the best commercial mortgage??
Since a commercial mortgage is quite complex. it’s a good idea to consider which mortgage to opt for carefully. Choosing the best commercial mortgage is a critical decision for any business or real estate investor, as it can significantly affect the financial health and success of the venture. Here are a few factors you might want to keep in mind:
Bad Credit
You can apply for a commercial mortgage even with a bad credit rating, however, paying the interest would mean spending it on a higher end to make up for the anticipated risk lenders take.
Secured Loans
Commercial mortgages are type of secured loan where the property is used as collateral against the loan.
Affordability
Checking affordability before going on the mortgage journey is essential. Deposits for these mortgages can be expensive so it is a good idea to make sure you will be able to pay the repayments.
What are my alternatives to business mortgages??
There are many alternatives to fund your business if a commercial mortgage is not for you. Some of them include:
- Bridging Loans – a type of loans to help business owners to complete the purchase of a property before managing to sell their existing property
- Short-term loans – can help with funding without making long-term commitments and are often used as a financial relief
- Personal loans – can be used to acquire £1,000 to £25,000
How to find the best commercial mortgage option with Revolution Brokers ?
Getting a commercial mortgage with the help of our experts can be really straightforward. Here’s what you should do:
1. Apply online
You are just one click away from finding the best mortgage deal for you. Fill out the form on our website and you will get to talk to one of our experts who can guide you through the process.
2. Discuss offers
Once you fill the form, you can discuss offers and go through some of the mortgage options before you officially accept the offer.
3. Accept the offer
The last step is to accept the offer and get the needed funds for your business.
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