Commercial mortgages

If you’re buying land or property for business purposes you’ll need a commercial mortgage. Find out more about commercial mortgages.

What is a commercial mortgage?

Commercial mortgages are medium to long-term loans that can be used to fund the purchase of business premises, or to buy an existing business.

Commercial mortgages are sometimes called business mortgages. 

You can also use a commercial mortgage to release capital from an existing building, which can be invested back into your business.

Commercial mortgages can also be used to buy an investment property that can be rented or leased to another business.

Who is a commercial mortgage suitable for?

The reason commercial mortgages are sometimes known as a business mortgages or business mortgage loans, is because they are often used by smaller companies to finance expansion plans or reduce costs; for example if they want to buy a business premises rather than rent one.

Why do I need a commercial mortgage?

If your business has outgrown the office space you are renting, or the landlord has proposed a painful hike in rent, you could consider buying your own, larger premises.

By buying property or land for business use you will own the premises as an asset. Not only does this save you from having to pay rent to a landlord, but your mortgage payments could be significantly cheaper, too.

However, with this asset comes extra risks that you will need to consider before signing on the dotted line.

Which kind of properties can I buy with a commercial mortgage?

Any property that generates income can be bought using a commercial mortgage. 

Shops, offices, retail outlets, industrial units and restaurants are obvious examples.

What’s the difference between residential and commercial mortgages?

While commercial mortgages are similar to residential mortgages in that they are a loan taken out for the purpose of buying a property or land, there are some significant differences.

Value

The value of the land or property for commercial mortgages tends to be larger than with residential mortgages.

Risk

With higher risks involved, lenders tend to require a larger deposit. Indeed, most lenders will require a commercial mortgage deposit of between 25% to 50%. 

This means you will be looking for mortgages with a maximum loan to value ratio (LTV) of 75% or lower.

Mortgage term

While residential mortgages tend to have a 25 to 30-year term as standard, a mortgage on a commercial property is typically much shorter. Indeed, they can be anything between 1 and 25 years, although many are capped at 15 years.

Semi-commercial mortgages

There are many types of mixed-use buildings required for businesses, such as a pub or shop with a flat above it. There are also homes with businesses attached, such as a B&B, hairdresser or cattery. 

These types of properties, that have both a commercial and residential element will need to be financed using a semi-commercial mortgage.

Types of commercial mortgages

There are two main types of commercial mortgage:

Owner occupier mortgages 

These types of commercial mortgages are when the business owner is looking to buy a property in which they can run their business.

Commercial investment mortgages 

These can be used if you are buying property as an investment opportunity, for example to rent out the property. These are considered more riskier than owner occupier commercial mortgages. It is also possible to take out a commercial buy to let mortgage that allows you to purchase a property that is let to one or more businesses.

Drawbacks of taking out a commercial mortgage  

Commercial mortgages can mean you end up paying less money longer term, especially if you are renting property in which you run your business.

If you’ve been renting for a while, you will suddenly be faced with being responsible for the maintenance and security of your business premises yourself, with all the costs that can entail. 

You may also have to factor in having to buy equipment, furniture, setting up a phone and internet connection and having adequate insurance.

Renting is flexible. If your company should expand or contract you can move premises accordingly, which is trickier when you own the building.

Commercial mortgages are also a type of secured loan, which means the property is used as collateral by the lender against the loan. If you fall behind on your payments, you could lose the property, which is an unnerving thought.

Advantages of taking out a commercial mortgage

With a business mortgage you can choose to buy suitably sized premises in a convenient location for you and your staff to get to, close to railway stations, bus routes and other facilities and with as many parking spaces as you need. 

You will have the freedom to adapt, modify and decorate it as you wish. And from a financial point of view, if property prices increase in the area, you will be the one getting the benefit from any gain in value.

If you should need to move to another location, you can choose to let your premises to another business and generate income this way.

You will no longer be paying rent to a landlord each month who not only holds a chunk of your money as a security deposit but can choose to raise the rent you’re charged.

How do commercial mortgage interest rates work

You need a bigger deposit

Getting a mortgage on commercial property is considered higher risk, which means the interest rates offered are significantly higher than those for residential mortgages. 

For this reason, commercial mortgage lenders typically insist on higher deposits as a percentage of the property’s value and more detailed application processes.

You get a better choice of rates

But interestingly, unlike residential mortgages, when you apply for a mortgage for business, there are no set rates. 

With so many different types of businesses in the UK there is no blueprint to follow, so each application must be reviewed thoroughly by the lender on its own merits and the associated risks calculated. 

What’s more, all industries are not equal. Businesses with lower risk will typically qualify for the best commercial mortgage rates, while higher risk firms may be offered higher interest rates.

Paying back your commercial mortgage 

Commercial mortgages tend to be available as fixed rate and variable rate products.

If you choose a variable rate, it will usually be charged at a percentage above either the Bank of England base rate, or the London InterBank Offer Rate (LIBOR). 

Should the tracked rate increase or fall, your mortgage payments will follow suit, so you would need to be confident you can still make your mortgage payments in this situation.

Commercial mortgage fees and charges 

Of course, no mortgage application is free, so you’ll have to factor in some additional fees.

Arrangement fees

Arrangement fees are charged at 1 to 2% of the loan amount for loans under £1m, and are usually added to the loan, once it has been approved.

Valuation fees

Like residential mortgages, commercial mortgage applications will require the property to be surveyed before approval. Surveys can cost upwards of £500.

Legal fees

Solicitor fees are also £500+ and you will usually need to pay the lender’s legal fees, too.

How you credit report affects your commercial mortgage application

While you don’t have to have a perfect credit score, your credit report will be thoroughly scrutinised and the better your score, the more likely your chance of approval. 

For this reason, it is advisable to check the information held on you by the three credit agencies in the UK: Experian, Equifax and TransUnion before applying to enable you to rectify any issues that could affect your application. 

Fortunately, this doesn’t have to cost anything as it is possible to obtain reports from each of the agencies for free.

Bad credit commercial mortgages

If you’ve had bad credit in the past, it doesn’t necessarily mean you won't be able to get a commercial mortgage. A number of mortgage providers will still lend to people with poor credit scores, for what’s rather dismally termed a bad credit mortgage. 

As you’d expect, bad credit mortgage rates tend to be pretty high and you’ll be expected to put down a hefty deposit, too. However, qualifying for one does mean you can buy a property and start cleaning up your credit record. 

What’s more, once your credit score has improved you will have the opportunity to remortgage to a cheaper deal. 

How to get a commercial mortgage

If you decide to apply for a commercial mortgage and hope to be offered the most competitive business mortgage rates, proper preparation will be worth its weight in gold.

Different lenders specialise in lending to different business types so take some time to investigate which lender is most suitable for you. It is also worth taking a look at some of the bigger lenders’ websites for some commercial mortgage rates comparison, to give you an idea of what is currently available.

You should ensure you have the necessary documentation, so that your commercial mortgage application can be processed efficiently:

While you may not need all of these documents, it can save you time if you do as well as demonstrate to the lender that you are a serious applicant.

Remember, lenders ultimately want evidence that indicates you have experience and know what you are doing. Submitting any proof that can support your case can help your application.

Using a mortgage broker to find a commercial mortgage

Commercial mortgages can be a bit of a minefield to navigate and off putting if you haven’t been trading for long. If it is a bit overwhelming, fortunately there are people that can help. 

By hiring a specialist commercial mortgage broker, you can benefit from their knowledge of the market and be paired with a lender best suited to your type of business. 

A broker takes the stress out of the mortgage application because they can advise you on the supporting documentation required and help you submit the forms, as well as find the highest loan to value ratio (LTV).

All brokers charge slightly differently so ensure you understand their fee structure.

Once you’ve made your application and any extra documentation has been submitted, the lender’s solicitors will carry out the legal due diligence. 

After this your application will go to the approval stage and you will receive your mortgage offer.

Alternatives to commercial mortgages

You may find a commercial mortgage is not the best option for your business. Alternative ways companies can borrow money include:

Short term business loans: These loans, taken over a short period of time, can help you with your cash flow when you need them, without any long-term commitments.

Bridging loans: These loans are short term, high-rate loans that are typically used by individuals that need to complete the purchase of one property, before buying another.

Development loan: These loans are usually taken out for 6 to 18 months for the purchase of land or development of buildings. The funds are issued in stages and must be authorised before the next stage can commence.

27 January 2021