We can help you compare the best commercial mortgage providers via clear information, accurate comparison and through our brokerage service.
Read our complete guide to mortgages for business below.
- What is a Commercial Mortgage?
- Commercial Mortgage Rates
- What is the Average Commercial Mortgage Interest Rate?
- How are Commercial Mortgage Rates Calculated?
- Fixed Vs Variable Rates
- Should you fix your mortgage rate?
- Commercial Mortgage Fees
- How Does a Commercial Mortgage Work?
- How Long Can You Get a Commercial Mortgage For?
- Compare Commercial Mortgage Lenders
- Who is Eligible for a Commercial Mortgage? What are the Criteria?
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 raising capital for significant renovation works.
Commercial mortgages are a form of business finance with higher rates than regular ones.
What Types of Commercial Mortgages are Available
- Owner Occupied – 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 to let it out for residential use, the appropriate mortgage is a residential buy-to-let. Professional landlords commonly use this, for example, and buy-to-let limited companies.
- Commercial Buy-to-Let – You will apply for a commercial buy-to-let when the property is intended to be let commercially. Since demand is generally lower for commercial properties, the mortgage rates will be less favourable.
Commercial Mortgage Rates
What is the Average Commercial Mortgage Interest Rate?
The current average commercial mortgage rate is approximately 3.5% to 4.5% for a 30-year term and 3% to 3.75% for a 15-year term.
More accurately, the market offers commercial mortgage interest rates of between 2.25% to as high as 18% for some businesses.
There are a considerable number of factors which contribute to this wide range which include:
- The total value of the property
- Size of the loan
- Credit Score of the tenant (for investment properties) and length of the lease
- LTV: loan-to-value ratio
- Credit history of the borrower
- Current financial health status of the business
How are Commercial Mortgage Rates Calculated?
Commercial mortgage rates are calculated based on a variety of factors, including:
- Loan size: The loan size can affect the interest rate and the lender’s risk. Larger loans may have higher interest rates and stricter requirements.
- Length and Quality of the Tenant and Lease (for investment properties): The size and quality of the tenant and lease can affect the lender’s risk and, therefore, the interest rate. Longer leases with credit-worthy tenants can result in lower interest rates.
- Type of Lender: Different types of lenders have different pricing structures. Banks, credit unions, and mortgage brokers may have different interest rates and requirements.
- Loan-to-Value Ratio (LTV): The loan-to-value ratio compares the loan amount to the property’s value. A lower LTV (below 60%) typically results in a lower interest rate.
- Credit History: Your credit history can affect the interest rate. A higher credit score can result in a lower interest rate.
- Financials/Strength of the Business: The financials and strength of the business can affect the lender’s risk and, therefore, the interest rate. Stronger businesses with stable financials may be able to secure lower interest rates.
Fixed Vs Variable Rates
Commercial fixed-rate and variable-rate mortgages have distinct characteristics.
A commercial fixed-rate mortgage is a loan whose interest rate remains the same for the entire term. This means the borrower will have a predictable monthly payment that does not change over time. This can benefit businesses with a stable income and budget for a fixed monthly payment.
On the other hand, a commercial variable-rate mortgage has an interest rate that can fluctuate over time. The interest rate is usually based on a benchmark rate, such as the London Interbank Offered Rate (LIBOR) or the Prime Rate, plus a margin determined by the lender. This means that the monthly payments can change over time, depending on the movement of the benchmark rate.
One of the main advantages of a variable-rate mortgage is that the interest rate is often lower than a fixed-rate mortgage, which can result in lower monthly payments. However, it also means that the borrower is exposed to interest rate risk, as the interest rate can increase and cause the monthly payments to become unaffordable.
Fixed-rate mortgages are considered safer, but the interest rate is higher, which results in higher monthly payments. They are good options for borrowers who want predictability and are willing to pay a higher interest rate for the peace of mind that comes with knowing exactly what their payments will be.
Should you fix your mortgage rate?
- Predictability: Fixed monthly payments can make budgeting and cash flow planning easier.
- Protection against interest rate increases: If interest rates rise, your fixed rate will remain the same, reducing the risk of higher monthly payments.
- Higher initial rate: Fixed rates are usually higher than variable rates at the outset, meaning you may pay more in the short term.
- Lack of flexibility: If interest rates drop, you will not be able to take advantage of the lower rates, even if your financial situation improves.
Commercial Mortgage Fees
In addition to interest rates of between 2.25% and 18%, commercial mortgages will come with some other fees, although these will differ depending on certain factors, not least of which is which provider you choose.
Here are the ones to be mindful of:
- Arrangement Fees – 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. This fee is often added to the loan, meaning you will not have to come up with upfront payments.
- Property Valuation Fees – All the lenders work in 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.
- Legal Fees – 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.
- Broker Fees – Traditional mortgage brokers typically charge a fee of 1% in addition to the lender’s own fee. If you’re using Business Expert, however, there are no fees. We are paid an introducer’s commission from the lender that does not impact your costs in any way nor result in a higher cost than had you gone to them directly.
In addition to these factors, commercial mortgage rates also consider the current market conditions and the overall risk of the loan. This can include factors such as the overall health of the economy and the level of competition among lenders.
Commercial mortgage rates are usually based on the London Interbank Offered Rate (LIBOR) or the Prime Rate, plus a margin determined by the lender.
Can you get a 100% Commercial Mortgage?
You can get a 100% commercial mortgage, removing the need for any upfront payment on your property.
100% comes with higher interest rates, but the benefits outweigh the risks for the right situation.
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 Much Deposit do I Need 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.
How Does a Commercial Mortgage Work?
- The borrower will have their credit checked and provide three years of corporate accounts, details of any liabilities, and 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 the risks have been assessed.
- In addition to financial details, you will need to submit photographs of the property.
- If you satisfy the lender’s 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 upon, you will need to pay monthly instalments, plus any interest if you agree on a repayment-type mortgage.
- If you selected an interest-only mortgage, the final repayment comes at the end of the term.
What are the Pros and Cons of a Commercial Mortgage?
Pros of a Commercial Mortgage
- Freeing yourself from the risk of sudden rent increases means taking a commercial mortgage brings with it the potential solidity of owning your property.
- Your mortgage repayment may be similar to or even less than your current rent.
- You will benefit from predictable monthly payments if you choose a fixed-rate mortgage.
- Subletting any free space could generate an extra source of income.
- Owning your own space gives you much more control over how you want it to look.
Cons of a Commercial Mortgage
- 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 Long Can You Get a Commercial Mortgage For?
While homeowners might get 25 or even 30 years of repayment, commercial mortgages are typically much shorter.
5-10 years is the standard duration of most commercial mortgages.
However, that doesn’t mean you have to pay the whole amount back in such a short time frame. Generally, lenders will offer repayment options that match a much longer term, i.e. 25 years, to make it more affordable for borrowers.
You would then refinance at the end of the time frame, either with the same or a new lender.
This is where paying particular attention to fine print around exit fees is particularly important. You will want to minimise additional costs if you choose to refinance at this stage.
Compare Commercial Mortgage Lenders
Like all finance sectors, various players lend money, each with distinct advantages and disadvantages. Here at Business Expert, we deal with them and constantly monitor their rates to offer the best deals with the most reliable lenders.
High Street Banks
High street banks like Lloyds, Barclays, Santander, and HSBC are the best-established lenders. Generally speaking, their rates are quite high, lending against the property’s open market value and with fairly high LTV ratios in place.
With these higher rates come the 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 marketplace, meaning it can take three months to get a mortgage fully approved, 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 a good example of a challenger bank. By keeping themselves largely off the high streets, these institutions save on costs and lower their fees. 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, catering to high-risk categories such as 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 your financial situation means you are only eligible to obtain a commercial mortgage from specialist lenders, a comparison is irrelevant. Their presence on the market broadens the sector’s possibilities, which is ultimately a good thing, assuming the terms and conditions are amenable and clearly understood.
Who is Eligible for a Commercial Mortgage? What are the Criteria?
The key factor in 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 an LTV (loan-to-value ratio) of about 50%. If the property is 400k, you’ll need 200k in cash. Better established businesses attempting an owner-occupied mortgage can obtain 80% LTV, assuming you’re not planning to break the property into smaller units. You become a commercial buy-to-let business as soon as you attempt this, meaning 75% LTV is the best you could hope for.
If your goal is to obtain a commercial mortgage to become 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, some other forms of business finance 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 the property or other assets, it may be possible to raise finance using a remortgaging facility.
How to Get the Best Possible Commercial Mortgage Rate Quote?
Getting an accurate commercial mortgage rate quote involves several steps:
- Review your credit score and financial history: Reviewing your credit report and correcting any errors can help improve your chances of getting a better rate.
- Shop around: Don’t settle for the first quote you receive. Reach out to multiple commercial mortgage lenders and compare their rates and terms. This will give you a better understanding of the current market and help you find the best deal.
- Consult with an experienced broker: An experienced broker with a deep understanding of the current providers can provide valuable insight into the current commercial mortgage market, saving you a lot of time in the process.
- Negotiate: Feel free to negotiate the rate and terms. If you have a strong credit score and financial history, you may be able to secure a better deal.