These are mortgages that let you buy any property that isn’t where you live and, as they are relatively complex, it’s worth considering speaking to a commercial mortgage broker. You may also be looking to refinance a commercial property you already own to get a better deal or release equity.
Although some mainstream lenders offer commercial mortgages, such as Barclays, HSBC, Lloyds Bank and NatWest, there are many other lenders offering them and some can only be accessed through brokers.
An independent mortgage broker can look at the whole market so you won’t miss out on any of the best deals available and they can help you find a mortgage with the loan-to-value (the amount you can borrow as a proportion of the property’s value) you need.
If you have more than one commercial property, using a broker can make it easier to get the best deal for all of them and you may be able to get one loan secured on your whole portfolio. They may also have good relationships with specific lenders.
As commercial mortgages can be complex, a broker can help you through the application process and make sure you are getting the best mortgage for your circumstances.
You should still be able to get a commercial mortgage if you have a poor credit history but you may pay a higher interest rate. It’s even more important to speak to a broker if you have bad credit as they can contact lenders that are likely to lend to you and make sure you don’t end up paying more than you need to for your mortgage.
Unlike residential mortgages, commercial mortgages are not regulated by the Financial Conduct Authority (FCA). As the FCA aims to protect consumers that are more vulnerable, this is not seen to be the case with commercial mortgage borrowers.
As a result, FCA standards don’t apply to commercial mortgages and you can’t complain to the FCA if you are mis-sold a commercial mortgage.
However, the National Association of Commercial Finance Brokers (NACFB) is an independent trade body for commercial mortgage brokers with more than 2,000 members across the UK. Its members are all authorised and regulated by the FCA and must agree to abide by a code of practice that aims to ensure they operate according to high standards, so it’s best to choose a broker that is a member.
The only circumstances under which a commercial mortgage is regulated by the FCA is if 40% or more of it will be your home – for example, you are buying a shop and intend to live in the flat above it.
You can search for a mortgage broker by visiting the NACFB website (nacfb.org), Unbiased.co.uk or Vouchedfor.co.uk.
Questions to ask brokers before choosing one include whether they cover the whole market or only recommend mortgages from certain lenders, what fees they charge, what’s included in their service and the hours they can be contacted. Also check that they are NACFB members if you’re not using its website to search.
Most commercial mortgage brokers are likely to follow a similar process, generally dictated by the mortgage application process:
You’ll first have a telephone or face-to-face meeting with the broker to discuss your needs. You’ll be asked a series of questions to capture your situation and requirements in detail. The broker will then go away and research the mortgage deals available to recommend the best one for you. You’ll then have one or more follow-up meetings to discuss this so you can decide on the best way forward.
When you’ve chosen a lender, the broker will contact it to arrange a mortgage decision in principle. This is a document that confirms that the lender is willing to lend you the amount you want to borrow, as long as all the information it has about you is correct and the property you choose is valued at an amount the lender is happy with. This will help you get an offer accepted on a property as the seller can be sure you have the funds available to buy it.
Once you’ve had an offer accepted on a property, you’ll be able to start the mortgage application process. The broker will let you know what documents you’ll need to provide to send to the lender. Once you’ve submitted everything that’s required, the broker will send the full mortgage application to the lender along with the documents.
The lender will check all the information you’ve provided and arrange a valuation of the property to make sure it offers enough security for the loan and that there are no problems with it. If the lender is happy it will send you a mortgage offer and a copy of it to the broker.
You’ll then go through the legal process of buying the property, exchange contracts and complete on the purchase, when the mortgage lender releases the funds.
Unlike residential mortgages, commercial mortgages tend to be bespoke to you according to how risky a borrower the lender thinks you are.
The interest rate you’ll be offered will depend on the health and track record of your business, your credit history, how much you want to borrow and your LTV. Rates can be fixed or variable and they tend to be higher than for residential mortgages. You can take out an interest-only or capital repayment mortgage.
There are 2 types of commercial mortgage:
Owner-occupier mortgages - when you intend to use the property to operate your own business
Commercial investment mortgages - where you are buying the property to let to another business
Investment mortgages tend to be the more expensive of the two as they are seen as higher risk.
Many commercial mortgage lenders will offer a maximum mortgage term of 20 years although some may allow up to 25 years but it can last for as little as 3 years. If you’re taking out a capital repayment mortgage you’ll pay a lower rate with a shorter term.
As with residential mortgages, the higher the deposit you pay the lower your interest rate is likely to be. You’ll usually get the best deals if you borrow 70% of the property’s value or less but you can usually borrow up to 80%. In some cases you can borrow up to 100%.
You can take out commercial mortgages on a wide range of property types including offices, care homes, pubs, restaurants, hotels, warehouses and business parks and you can borrow as an individual or business, such as a partnership or limited company.
Examples of some of the products offered by high street lenders include Barclays’ commercial mortgage, which gives you the option of a fixed rate lasting 1 to 10 years or a variable rate. You can switch to a fixed-rate loan later if you take out a variable rate initially.
Loans must be more than £25,000 and your mortgage term can be up to 25 years but you may have to pay early repayment charges if you want to pay it off early. You may be able to take capital repayment holidays, which means you would only pay the interest for a period.
Lloyds Bank offers loans from £25,001 over terms of 3 to 25 years. You can borrow up to 70% of the property’s value – more in some cases. It offers fixed rates or variable rates. Early repayment fees may apply and capital repayment holidays are available.
NatWest lets you borrow from £25,001 to £10 million if you are taking out a fixed rate. Rates can be fixed for 3, 5, 7, 10 or 15 years. The minimum you can borrow with a variable rate is £35,001 but there is no upper limit.
As with Barclays and Lloyds Bank, you can take out your mortgage for up to 25 years and capital repayment holidays are available but there are no early repayment charges.
Fees you have to pay are similar to those that would apply when taking out a residential mortgage and could include:
Arrangement fee – this is a fee you have to pay to the lender for arranging the mortgage. This may be added to the loan or deducted from it on completion of your property purchase and could be 1-2% of the loan amount.
Valuation fee – the lender will want to value the property to make sure it provides adequate security for the loan and will commission one of its panel of valuers to carry out the valuation. You usually pay this fee when you submit your mortgage application, which is likely to be more than you would pay for a valuation on a residential property.
Legal fees – you’ll usually pay the lender’s legal fees as well as your own. Again, these are likely to be more than you would pay with a residential mortgage as the transaction is more complicated.
Broker fee - this could be 1% of the loan amount, which you would pay once you have received your mortgage offer. In some cases there may also be an initial administration fee.
When you’re applying for a commercial mortgage, you’ll usually need to provide the following, although it varies between lenders:
Proof of address and identity
Evidence of your personal income
Documents proving your assets, liabilities, income and expenditure
3 to 6 months of personal bank statements
You’ll also need to provide additional information according to whether you’re applying for an owner occupier mortgage or a commercial investment mortgage:
At least 2 to 3 three years of trading figures for your business although projections may be considered if you have been trading for a shorter time.
3 to 6 months of business bank statements.
Information about any changes that are likely to affect the turnover or profit of your business.
A copy of the lease you’ll be using to let the property and details of the tenant. There are a few lenders who lend on vacant properties but this is uncommon.
Proof of the rental income you’ll be getting.
Information about any other investment properties you own.
You should provide as much information as you can to help the lender assess your application as quickly as possible. It’s also a good idea to scan all your documents so you have electronic copies available if you are asked for them.