What is a Commercial Mortgage?
Commercial mortgages are business 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.
Commercial mortgages are essentially a form of business finance, coming with higher rates than regular mortgages.
Types of Commercial Mortgage
When a company wishes to buy the premises it currently rents, or buy a new property, you would generally apply for an owner occupied mortgage.
Residential Buy to Let
When a business wishes to purchase a property with the intention of letting it out for residential use, the appropriate mortgage is a residential buy to let. This is commonly used by professional landlords, for example, and buy-to-let limited companies.
Commercial Buy to Let
When the property is going to be let out commercially, you would apply for a commercial buy to let. Since demand is generally lower for commercial properties, the mortgage rates will be less favourable.
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 Interest Rate?
Very broadly you should expect to find interest 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
Are Their Other Fees Involved?
Commercial mortgages will come with some other fees, although these will differ depending on certain factors, not least of which being which provider you choose. Here are the ones to be mindful of:
These fees are commonly 1-2% of the total loan amount, if the figures in question are £1m or less.
Some providers will request these up front to cover their working costs if you choose not to accept their offer. More often than not this fee is added to the loan, meaning you will not have to come up with up front payments.
Property Valuation Fees
All the lenders work valuation teams so that the properties are independently and fairly appraised. An average property valuation costs around £500 for a simple case, and can go substantially higher where the property is extensive.
These fees would be due once the offer has been accepted.
Inherent in any commercial contract comes legal fees, which are generally about £500 each for both the lender and the borrower in these cases. With commercial mortgages, it is customary for the borrower to pay both fees.
Traditional mortgage brokers typically charge a fee of 1% in addition as their own fee.
If you’re using Business Expert, however, there are no fees of any kind. We are paid an introducers commission from the lender, that does not impact your own costs in any way, nor result in a higher cost than had you gone to them directly.
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?
- 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.
- Because there are no set rates in this industry, your rate will not be offered until all of the risk has been assessed.
- In addition to financial details you will need to submit photographs of the property.
- 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.
- Once the loan is agreed you will need to pay monthly instalments, plus any interest if you agreed on a repayment type mortgage.
- If you selected an interest only mortgage the final repayment comes at the end of the term.
- 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.
- 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.
Commercial Mortgage Lenders / Providers
Like all sectors of finance, there are a range of players lending the money, each with distinct advantages and disadvantages. Here at Business Expert, we deal with all of them and are constantly monitoring their rates as we endeavour to offer the best deals, with the most reliable lenders.
High Street Banks
The best established lenders are the high street banks like Llloyds, Barclays, Santander, and HSBC. Generally speaking their rates are quite high, lending against the open market value of the property and with fairly high LTV ratios in place
With these higher rates come benefits of reliability and trust, plus shorter tie in periods than many newer lenders.
They are generally more stringent on the type of loans they want to accept, however, refusing those with credit issues or a lower income. They also move slower than some of the more agile lenders in the market place, meaning it can take 3 months to get a mortgage fully approved, and sometimes even longer.
The challenger banks are making great inroads into the commercial mortgage lending market, largely by offering, a strong customer focus, and an emphasis on online user interaction.
Metro bank would be good example of a challenger bank. By keeping themselves largely off the high streets, these institutions save on costs and keep their fees lower. It’s worth remembering that the challengers are bound by the same FCA regulations as the big four, meaning they are still a very trustworthy option.
Challenger bank downsides are usually slightly higher lending fees than the Big Four, plus higher exit fees.
Specialist Commercial Mortgage Lenders
Offering the greatest flexibility of them all are the specialist commercial mortgage lenders. Many of these lenders will extend their lending reach to broader geographic areas than the more traditional providers, as well as catering to high risk categories such a lower credit ratings.
They are commonly more expensive than high street banks, with higher exit fees. As a further disadvantage, they’ll lend against the FSV (Forced Sale Value) which reduces the percentage of the property value you can borrow.
The key point here is that, if you’re financial situation means you are only eligible to obtain a commercial mortgage from specialist lenders, a comparison is irrelevant anyway. Their presence on the market broadens the possibilities of the sector which is ultimately a good thing, assuming the terms and conditions are amenable and clearly understood.
Borrowing Criteria and Eligibility
They key factor with a company’s ability to obtain a successful commercial mortgage quote is trading history. The High Street banks require a minimum of three years filed company accounts, while the Challenger banks will accept two.
If you’re trading history is short, you’ll need a LTV (loan to value ratio) of about 50%. This means that if the property is 400k you’ll need 200k in cash. Better established businesses attempting an owner-occupied mortgate will be able to obtain 80% LTV, assuming you’re not planning on breaking the property up into smallers units. As soon as you attempt this, you become a commercial buy-to-let business, meaning 75% LTV is the best you could hope for.
If your goal is to obtain a commercial mortgage with the intention of becoming a professional landlord, the lenders will require evidence of your experience in this area, ideally at least a year.
What are the Alternatives to a Commercial Mortgage?
If you decide that a commercial mortgage isn’t the right choice for you, there are some other forms of business finance which might fill the bill. They include:
Bridging Loans – Short term business finance that is fast to arrange, bridging loans generally work with a clear exit strategy in place over timeframes of 12 months or less.
Business Loans – Available as either secured or unsecured, conventional business loans will almost certainly need security (or a personal guarantee) when exceeding £25,000.
Remortgaging Facility – Where a business needs to raise capital fast and has existing equity in property or other assets, it may be possible to raise finance using a remortgaging facility.