A commercial mortgage, sometimes called a business mortgage, is the finance you will need if you are aiming to buy or refinance a property that is used for business purposes.
What is a commercial mortgage?
A commercial mortgage is a loan secured on a fully or semi-commercial property. Commercial mortgages can be used to purchase business premises or to acquire an existing business. Examples include a shopping centre, an office building, an industrial warehouse, or a block of apartments.
Why is it important to compare commercial mortgages?
There is a marked difference between the commercial mortgages offered by high street banks and the specialist commercial mortgage lenders, both in terms of their interest rate pricing but also their criteria. For example, in one scenario the specialist lender may offer you a loan of 75% of the property value whereas the high street lender will only offer 50%, or vice versa. In another scenario, the high street lender will insist on the commercial mortgage being on repayment over a 15-year term, whereas the specialist lender will allow an interest only commercial mortgage over a longer timeframe.
If you have a good relationship with your business’ bank, we encourage you to obtain a commercial mortgage deal from them, as a starting point. But as we have seen in the residential mortgage market, loyalty to your bank often does not get rewarded with the best deal for your business. Propp can help you shop around to compare not just the rate but the whole deal, including fees and commitments.
You would shop around for the best value when buying goods or services for your business, so why shouldn’t you shop around before taking on one of the biggest commitments your business will ever undertake?
Factors such as speed and likelihood of acceptance can be important for some businesses, working with an expert can help save you time and money.
What kind of property can be purchased with a commercial mortgage?
A commercial mortgage can be used to finance any premises that generates an income for a business or investor. Most commonly we see applications for office buildings, shops, pubs, care homes, industrial units, and restaurants.
Who can take out a commercial mortgage?
There are two types of products available; a commercial owner occupied mortgage and a commercial buy to let mortgage. The type you need will depend on whether you are a business owner looking to purchase your own premises or an investor building a commercial portfolio.
Commercial owner occupied mortgage
The main benefit of being an owner-occupier of a commercial space rather than a tenant is owning an asset that will appreciate over time rather than paying similar monthly rent payments that contribute nothing to your net worth. It leaves you in control of your space, taking away the worry of eviction, unwanted changes or rent hikes.
Commercial buy to let mortgage
Some property investors will purchase commercial property with the intention of renting it to business owners while sitting on an appreciating asset. Rather than buying a commercial property using cash, an investor is likely to apply for a commercial mortgage to fund the purchase or to refinance a premises they already own. The investor may find ways to increase the rental yield as well as the value of the site by changing the use to better reflect the demand in the area. For example, a high street building used solely for retail may be adapted and converted to allow for residential dwellings that can be sold or rented out.
How much can I borrow with a commercial mortgage?
The maximum loan will vary from lender to lender, which is why it’s important to compare commercial mortgages. The amount you can borrow will be decided following an assessment of you and your business’ financial circumstances. Lenders need to know that the business is profitable enough to be able to service mortgage and interest payments over a period of many years.
Some lenders are flexible and will be willing to consider additional assets or forms of income and factor them into their assessments.
The loan will also be a maximum percentage of the property value. For example, a commercial mortgage of £200,000 against a commercial premises worth £400,000 is 50% loan-to-value.
How much does a business mortgage cost?
Lenders will look at various elements of your circumstances to calculate commercial mortgages rates. The lower the LTV (Loan-to-Value) you require, the lower the rate will usually be. See our price comparison table for indicative business commercial mortgage rates.
What are average commercial mortgage rates?
At the moment, commercial mortgage rates range from 5.5% to 9%, but the rate you will be offered will depend on the size or your deposit, the type of commercial property you want to purchase and whether you want to secure a fixed or variable rate.
Because every application is weighed on its own merits, it’s difficult to give you an indication of the rate you’ll pay without knowing the details of your purchase. That is why we built a commercial mortgage comparison site so you can plug in the details we need to give you an estimate of your costs.
Commercial property lenders will use the information you provide to determine if they are in a position to accept your application based on the information you provided.
How can I secure lower commercial mortgage rates?
As with all mortgages, the more deposit you put down the lower your commercial mortgage rate will be. But Loan-to-value is just one of the things that impacts the rate you will be charged, so lets take a look at the factors that most effect the cost of your commercial mortgage.
What factors have the most impact on commercial mortgage rates?
The Loan-to-Value (LTV)
will have quite a significant impact on the commercial mortgage rates that you’re likely to be offered. The more you have invested in the property the lower the risk to the lender, and they’ll reward you for that with a lower rate. If you have the cash available, it’s worth putting a higher deposit down in order to get access to the best commercial mortgage rates.
If you’re an owner-occupier, the sector you are operating in is likely to impact your rate too, and again this correlates with the level of risk your business is deemed to be.
Commercial mortgage lenders will usually demand a higher rate for recession vulnerable sectors such as retail, hospitality, pubs and hotels. Although this may seem unfair, it makes sense as these are the areas of spending that are typically first to go when we get squeezed – so these businesses are deemed higher risk.
On the other side of the scale, if you’re in the market for a premises for your GP, Dentist Surgery or Veterinary Surgery you’ll see the best commercial mortgage rates as these are deemed essential services that aren’t likely to go under in an economic downturn.
Commercial mortgage rate type
Similarly to residential mortgages, you’ll find that fixed rate commercial mortgages are pricier than variable rates – this is because you’re paying to be protected from base rate rises.
If you’ve operated in your chosen market for a while and have evidence of strong books (what commercial mortgage lenders like to call ‘sustained affordability’), you’re likely to be rewarded with a lower commercial mortgage rate.
The shorter the term, the better the deal in the eyes of your commercial mortgage lender. Not choosing the maximum term indicates that the deal is affordable for you, which means the likelihood of you defaulting is smaller – hence the lower rate!
You’re likely to secure a lower rate in London than you would for the same premises in Scarborough for instance. Again, this ties into likelihood of business success and whether right or wrong, some areas are less vulnerable to economic downturns.
Perhaps not a term you’re familiar with so let us explain. This applies to buy-to-let commercial property. A commercial mortgage lender will look at the tenant you have in situ and assess the risk of them going out of business or falling behind on rent. Having a big brand like Lidl in your unit under a 15-year lease is much lower risk than having an independent tenant in situ. Investors that lease their units to big brands to benefit from covenant strength usually benefit from the best commercial mortgage rates.
How do commercial mortgage rates vary in comparison to residential?
If you’ve just used our commercial mortgage comparison tool, you’ll notice commercial rates are a bit higher than what you’re used to seeing for standard residential mortgages.
There’s a few reasons for this; it costs commercial lenders more to borrow the money they lend, so they naturally have to charge their borrowers more money.
Secondly, commercial mortgages are much more specialist and need higher-skilled and more experienced teams to assess, underwrite and lend the money than required for residential. If you compare the valuation for residential vs commercial you’ll see how much more there is to it!
Finally, the commercial property market is much smaller than the residential market so prices are slightly higher as there isn't economies of scale to bring the overall cost down.
Where can I find the best commercial mortgage rates?
On Propp.io! We have a spread of commercial mortgage lenders on our panel from across the whole market including highstreet banks and challenger banks.
You can access their rates, fees and costs right here on the site. Just fill in the information at the top of the page and our comparison engine will show you the lowest rate we have on panel based on your criteria.
Our team of commercial finance experts will then work with you to match you with the best lender for your goals and support you throughout the whole application until the money lands in the bank.
Do I need a deposit for a business mortgage?
Yes, most of the time. Commercial mortgages require you to provide a higher deposit than with a residential mortgage, typically between 25% and 40%. Given that commercial property is usually more expensive than a residential home this can end up being quite a substantial sum, but the more deposit you have the better your chances are of securing the finance you are looking for.
Some scenarios, such as GP Practices where their income is more secure, a commercial mortgage lender is happy to lend to a higher loan to value.
Do you pay stamp duty on commercial property?
In the case of commercial property, the nil-rate band is £150,000, and above that, stamp duty is payable on the increase in value.
For example, in the case of a commercial property purchased for £200,000, nothing would be due on the first £150,000. However, 2% stamp duty would be payable on the remaining £50,000.
Anything over £250,000 will be charged at a rate of 5%.
There are commercial stamp duty rates whether you are purchasing a freehold property or acquiring a leasehold.
Since stamp duty can be applied to outright property purchases, new lease premiums, or existing lease prices, the calculations can be confusing when calculating Stamp Duty on commercial property.
If a commercial lease is involved, the rules surrounding stamp duty can become even more confusing. The amount of stamp duty payable can depend on a few things:
The Length of the lease term
- Any premium paid for the lease
It also worth noting that any VAT paid is included in the calculation.
In addition to stamp duty, you must pay an additional charge based on the value you calculate for the lease. For amounts below £150,000, there is no tax, and for amounts between £150,001 and £5,000,000, there is a 1% tax. A 2% tax is applied to any portion worth more than £5 million.
For more information on this, check out the HM Revenue & Customs commercial property stamp duty calculator.
What are the fees associated with a commercial property mortgage?
If you are applying for commercial finance, you will also have to consider the following costs:
- Some lenders charge arrangement fees to set up your account.
- Exit fees can be costly if you leave a deal before its initial or fixed term is over.
- Application fees are not charged across the board, but some lenders charge a fee before they consider an initial application.
Don’t hesitate to contact us if you have questions about the fees charged or if you are worried you are paying too much. With our help, you will find the right lenders with the most competitive fee structures.
What is the difference between a business mortgage and a residential mortgage?
Typically, the mortgage term for a commercial property is shorter than a residential mortgage, unlikely to be the 30-to-40-year term we may see for a residential mortgage.
When applying for a commercial mortgage you can expect to provide trading business accounts, up to date bank statements to demonstrate the current trading position of your business. You may be asked to provide a personal guarantee for some or all the debt.
When do I need a semi-commercial mortgage?
If you are looking to purchase or refinance a mixed-use property, you will need a semi-commercial mortgage. By mixed-use, we mean a property that is made up of a combination of commercial and residential. For example, a retail shop with a flat above, or a Bed and Breakfast.
What is a commercial owner-occupied mortgage?
A mortgage secured against the premises you run your business from. Some lenders will only want to lend a commercial mortgage to owner occupiers. So, if you own the commercial premises but let it to another business, we can help you negotiate for the best commercial mortgage from the lenders that are happy to work with commercial investment mortgages.
What does a mixed-use mortgage mean?
The term ‘mixed use’ can mean the commercial building also has an element of residential inhabitant, for example a flat above a shop. This is also known as semi commercial.
Sometimes the term mixed use can also mean that the business owner personally lives in the building. Because you are living in the commercial premises it can complicate applications because you are using it for your own residential use, which brings a more stringent element of FCA regulation for lenders.
Factors to consider when choosing a commercial property mortgage
In order to secure the most favourable lending rates and terms, several factors must be considered. Here at Propp, we work closely with every client to understand what you need to raise finance for. We also need to understand how long the funds are required, and what type of commercial property lending will be best suited to your needs. On top of this, we will look at:
- What the funding is required for.
- How much deposit you have available.
- Whether your commercial property mortgage will be in your name or the name of the business.
- If the business is a limited company or another type of commercial entity.
- What type of property you wish to secure your lending against.
- Whether the property is VAT registered.
- How close you are to buying, and how fast you need your funds.
- Whether you have any adverse credit history to consider.
- What the price of the property is, and what the rental revenue is expected to be if you’re purchasing it as an investment property.