What is a commercial mortgage?
A commercial mortgage is the finance you will need if you’re aiming to buy or refinance a property that is used for business purposes.
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 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’ve seen in the residential mortgage market, loyalty to your bank often doesn’t 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.
You would shop around for the best value when buying goods or services for your business, 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.
Who can take out a commercial mortgage?
You may find yourself needing a commercial mortgage if you are a business owner that wants to own and occupy your office or business premises. Commercial mortgages are also used by property investors that purchase and let out commercial property.
Business mortgages for owner-occupiers
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 mortgage for investors
Property investors will purchase commercial property with the intention of leasing it to business owners while sitting on an appreciating asset.
Rather than buy 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.
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.
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 of the debt.
How much can I borrow for a commercial mortgage?
This will vary from lender to lender based on their criteria. 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 in to 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 would be treated as 50% loan-to-value.
How much does a business mortgage cost?
Lenders will look at varying elements of your situation 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 mortgage interest rates.
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’re 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.
When do I need a semi-commercial mortgage?
If you’re looking to purchase or refinance a mixed-use property, you’ll 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 'Mixed Use' 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’re using it for your own residential use, which brings a more stringent element of FCA regulation for lenders.