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What is a Commercial Mortgage

Commercial mortgages are loans secured on a property that does not qualify as your main residence.

They’re the standard means of buying property as a business, buying property as an investment, or for raising capital for significant renovation works.

What Deposit is Needed for a Commercial Mortgage?

A standard deposit for a commercial mortgage is between 20% and 40% of the total value.

It is possible to borrow up to 80% of the total property value in the form of a mortgage.

What is the Average Commercial Mortgage Rate?

Very broadly you should expect to find rates of between 2.25% and 18%.

There are a huge number of factors which contribute to this wide range which include:

  • Total value of the property
  • Size of the loan
  • Credit Score of the tenant (for investment properties) and length of lease
  • LTV: loan to value ratio
  • Credit history of the borrower
  • Current financial health status of the business

Can you get a 100% Commercial Mortgage?

You can get a 100% commercial mortgage, which will remove the need for any up front payment on your property.

100% come with higher interest rates but for the right situation the benefits more than outweigh the risks.

Where the business has assets that are available as loan security, but lacks the necessary capital for a deposit, a 100% commercial mortgage can provide the answer.

How Does a Commercial Mortgage Work?

  1. Borrower will have their credit checked as well as providing 3 years of corporate accounts, details of any liabilities, profiles of all the directors in the business. You will also need financial projections.
  2. Because there are no set rates in this industry, your rate will not be offered until all of the risk has been assessed.
  3. In addition to financial details you will need to submit photographs of the property.
  4. If you satisfy the lenders criteria they will make you an offer. Usually this will entail a loan to value ratio (LTV) meaning you will need to invest some of your own money into the purchase.
  5. Once the loan is agreed you will need to pay monthly instalments, plus any interest if you agreed on a repayment type mortgage.
  6. If you selected an interest only mortgage the final repayment comes at the end of the term.

Advantages

  • Freeing yourself from the risk of sudden rent increases means taking a commercial mortgage brings with it the potential solidity of owning your own property.
  • Your mortgage repayment may be similar or even less than the rent you are currently paying.
  • Assuming you choose a fixed rate mortgage, you will benefit from predictable monthly payments.
  • Subletting any free space could generate an extra source of income.
  • Owning your own space gives you a lot more control about how you want it to look.

Disadvantages

  • Interest rates are higher than domestic mortgages.
  • You will require a mortgage deposit before the mortgage can be secured.
  • Relocation can be more complicated once you own your business premises.
  • Variable rate mortgages will leave you at risk of rising interest rates.
  • A slump in the property market would decrease your capital .

How many Years is a Commercial Mortgage?

While home owners might get 25 or even 30 years repayment time frame, commercial mortgages are typically much shorter.

5-10 years is the standard duration of most commercial mortgages.

That doesn’t mean you have to pay the whole amount back in a such a short time frame, however. Generally, lenders will offer repayment options that match a much longer term, i.e. 25 years, to make it more affordable for borrowers.

At the end of the time frame, you would then just refinance, either with the same or a new lender.

This is where paying special attention to fine print around exit fees is particularly important. You will want to minimise additional costs if you do choose to refinance at this stage.

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