Today we will be giving you a complete run down about commercial mortgages and what to expect. Keep reading for more information.
A commercial mortgage is a type of loan that is secured on a 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 will need security to reduce the risk to themselves.
A business mortgage usually lasts from 3 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 are borrowing in relation to how much the property is worth. If it is an investment then the amount you can borrow will be determined based on 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 will 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.
The benefits of taking out a commercial mortgage
Some reasons as to why you might get a commercial mortgage are:
- The interest on your commercial mortgage is tax-deductible.
- If your property increases in value, your capital could also see an increase.
- You will be able to rent out the property to generate extra income.
How to apply for a commercial mortgage
Hiring a broker could help ensure you are 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 will then be asked to complete the commercial mortgage application form.
3. You will then 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 will receive a mortgage offer by the bank.
It is a good idea to collate the necessary documents ahead of time, so your application is processed quicker:
- 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 are able to pay off the loan.
Areas to consider
Since a commercial mortgage is quite complex by nature, it is a good idea to carefully consider which mortgage to opt for and ensure you can afford the monthly repayments. Here are a few factors you might want to keep in mind:
- You will usually still be able to apply for a commercial mortgage if you have a bad credit rating, but you will likely pay a higher 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 will likely lose ownership of your real estate.
- Deposits for this kind of mortgage can be quite hefty, so it is a good idea to ensure you will 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 have not been trading for long, lenders may see this as a sign of high-risk and request personal guarantees.
Types of commercial mortgages
Mortgage loans can be divided into two categories:
Owner-occupier mortgages: This is used to buy a property that will be used as a trading premises for your business.
Commercial investment mortgages: This is used for a property that you are planning to let out.
How do you pay interest on a commercial mortgage?
Many commercial mortgages are paid at a variable rate. Typically, a rate will be quoted as X% over base or LIBOR (essentially a benchmark interest rate), 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, may be beneficial.
The rates charged for commercial mortgages and business loans are not determined from the off-set like most personal loans are. Lenders will usually have a risk profile that they work to, so if your loan falls outside their risk profile it will be rejected.
What fees are involved?
Arrangement fees: Arrangement fees are typically added to a loan after it has been approved however, some lenders may request the arrangement fees earlier to cover their work in case you do not accept their offer. Arrangement fees are typically 1-2% of the loan amount for loans up to £1 million.
Valuation fees: Just like a residential property, 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 will 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 based on your circumstances and real estate and will present your case to the lenders. Their service is usually charged at up to 1% of the loan value.
Eligibility and criteria
For an individual to qualify for a commercial mortgage, they will need to pass the lender’s eligibility checks which typically includes:
- The cash flow and any debts you may owe to assess the financial health of the business.
- The businesses projected income to determine whether they can afford the cost of the loan.
- The individual’s ability to pay for the deposit which can range from 20-40% of the loan.
- Rental income may also be considered as this will influence the businesses cash flow.
- General income, credit, and assets.
Alternatives to a business mortgage
There are several alternative options that you can choose from if you decide that a business mortgage is not right for you:
Bridging loans can help you complete the purchase of a property before you manage to sell your existing property.
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 other 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.
