About commercial mortgages
A commercial mortgage is any loan secured on property which is not your residence. Buy to let mortgages are a special type of high volume commercial mortgage which is packaged for a volume market.
When are commercial mortgages used?
Commercial mortgages generally take over where business loans finish. Business loans up to £25,000 are unsecured, but for larger amounts lenders need security in order to reduce the risk to themselves.
A business mortgage usually lasts from three to 25 years and you can usually find a 70-75% mortgage. This is a measure of loan-to-value ratio to see how much you’re borrowing in relation to how much the property is worth. If it’s an investment then the amount you can borrow will be determined by the rental income generated by the investment, but this will not exceed 65% of the purchase price. If you are buying a business which includes goodwill, stock etc then the amount available will be further reduced.
Key features of taking out a commercial mortgage
A business mortgage plan differs from a regular mortgage in the following ways:
There are usually no fixed rates for commercial mortgages
You’ll usually pay a higher interest rate on commercial mortgages compared to regular home mortgages as these are considered higher-risk to lenders
Commercial mortgages tend to offer better interest rates than regular business loans as these require property as collateral
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The benefits of taking out a commercial mortgage
Here are a few reasons why you might want to think about taking out a commercial mortgage:
The interest on your commercial mortgage is tax-deductible
If your property increases in value, your capital could also see an increase
You’ll be able to rent out the property to generate extra income
How to apply for a commercial mortgage
Hiring a specialist broker could help ensure you’re paired with the most suitable lender and make the application process more manageable. A commercial mortgage application works similarly to taking out a regular mortgage for your home:
1. You complete and submit the Asset and Liability form (this can usually be done online)
2. You’ll then be asked to complete the commercial mortgage application form
3. You’ll be required to provide information on your business (listed below)
4. The property is valued
5. All legal due diligence will be carried out by the lender’s solicitors
6. If approved, you’ll receive a mortgage offer by the bank
It’s a good idea to collate the necessary documents ahead of time, so your application is processed more efficiently:
Bank statements usually covering the last 3 months
Trading figures usually covering the last 3 years
Proof of identity and address
Lease and/or tenancy agreements
You may have to provide a business plan for financial projections – this could help the lender determine how likely you’re to be able to pay off the loan
Points to consider
Since a commercial mortgage is quite complex by nature, it’s a good idea to carefully consider which mortgage to opt for and ensure you’re able to afford the monthly payments. Here are a few factors you might want to keep in mind:
You’ll usually still be able to apply for a commercial mortgage if you have a bad credit rating, but you’ll likely pay a high interest to make up for the risk the lenders take
Mortgages are a type of secured loan where the property is used as collateral by the lender against the loan, so if you default you’ll likely lose ownership of your real estate
Deposits for this kind of mortgage can be quite hefty, so it’s a good idea to ensure you’ll be able to pay both the deposit and the monthly repayments comfortably
A broker can often help you find the highest loan to value ratio (LTV)
If you haven’t been trading for long, lenders may see this as a sign of high-risk and request personal guarantees
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Types of commercial mortgages
Mortgage loans can be divided into two categories:
Owner-occupier mortgages: This is used to buy property that will be used as trading premises for your business.
Commercial investment mortgages: This is used for property you’re planning to let out.
How do you pay interest on a commercial mortgage?
Most commercial mortgages are paid at a variable rate. Typically, a rate will be quoted as X% over base or LIBOR, and this in residential terms would be called a tracker mortgage. Fixed rate mortgages are available and for amounts under £500,000, where the lender takes the rate risk themselves, they may be advantageous.
The rates charged for commercial mortgages and business loans are not determined from the off-set like most personal loans are. Lenders usually have a risk profile that they work to, so if your loan falls outside their risk profile it will be refused.
What fees are involved?
Arrangement fees: Arrangement fees are typically added to the loan after the loan is approved but some lenders may request the arrangement fees earlier to cover their work in case you don't accept their offer. Arrangement fees are usually 1% -2% of the loan amount for loans up to £1 million.
Valuation Fees: A valuer will visit the property and write a report to the lender. Commercial valuations can start at around £500 for a simple case, the fees are based on an individualised quotation which is payable to the lender after an initial indicative offer has been accepted.
Legal Fees: You’ll need to pay both your own legal fees as well as the lender’s which can start at around £500 for each party.
Broker fees: A broker gives you advice specific to your situation and real estate and presents your case to the lenders. Their service is usually charged at up to 1% of the loan value.
Eligibility and criteria
In order for you to qualify for a commercial mortgage, you’ll need to pass the lender’s eligibility checks which usually includes:
The cash flow and any debts you may owe to assess the financial health of your company
Your businesses’ projected income to determine whether you can cover the cost of the loan
Your ability to pay the deposit which can range from 20% to 40% of the loan
Rental income may also be taken into account as this will have an effect on your business’ cash flow
General income, credit and assets
Alternatives to a business mortgage
There are several alternative options you can choose from if you decide that a business mortgage is not the right choice for you:
Bridging loans can help you complete the purchase of a property before you manage to sell your existing home.
Short-term loans can help you access funds without making any long-term commitments. This is often used for financial relief to cover working capital, cash flow, and a variety of expenses.
Personal loans can be used to borrow anywhere from say £1,000 to £25,000 - you do not have to be a homeowner to apply.
Compare commercial mortgages
Find the best loan to value ratio with B2B Commercial mortgages who offer an online service while charging no broker fees. B2B are NACFB members can help you find the best deal suitable to your financial needs.