What is a commercial mortgage?
A commercial mortgage is a form of lending used to finance the purchase or development of any property that is not your personal home. They are available to individuals or companies and may be used for a variety of property acquisitions.
The property itself, and the reasons for which it’s being acquired, vary significantly in comparison to a residential counterpart. Commercial mortgages are therefore assessed on a unique, case-by-case basis.
How do commercial mortgages differ from other business loans?
Commercial mortgages are a specialised type of business loan. Other business loans may cover salaries, new equipment and other expenses of establishing or expanding a business, but a commercial mortgage is tailored specifically to fund the purchase of property.
Though the agreements are highly unique and individualised, there are a few trends that commercial mortgages usually have in common:
- They tend to offer longer repayment periods than other business loans.
- The minimum loan threshold is usually at a higher rate.
- Commercial mortgages are also less likely to set a maximum loan threshold than other types of business loans.
What type of property can I buy with a commercial mortgage?
Many companies looking to purchase, move, improve or expand their current premises will turn to commercial mortgages.
The type of property could be anything from a renovation project for a property development, through to an office space for a business.
How much can I borrow through a small business loan?
Business loans can range from hundreds of pounds to hundreds of thousands, depending on the type of loan, provider and the circumstances of your business.
Are there any types of property I can’t buy with a commercial mortgage?
Any property intended to be your personal residence will not be eligible for a commercial mortgage. Residential properties for your personal use are generally purchased using residential mortgages or via alternative financing methods.
How much money can I borrow with a commercial mortgage?
Commercial mortgages are generally available for £25,000 or higher, though this varies depending on the individual lender. Assets costing less than £25,000 are usually purchased using other types of business loans, or alternative funding methods.
The maximum amount you can borrow with a commercial mortgage can run into the millions. It’s all dependent on your personal circumstances.
What level of loan-to-value can I get with a commercial mortgage?
With commercial mortgages, most banks will allow you to borrow 70 per cent of the funds required to purchase the property. This is a general average; some commercial mortgages only allow up to 65 per cent, and others will allow as high as 80 per cent loan-to-value (LTV). Your business will have to provide the remaining value of the property as an up-front cost.
How long are the repayment periods on commercial mortgages?
Commercial mortgages tend to offer repayment plans of between three and 25 years. This is a general average, with some being offered on terms as low as 1 year, and others as high as 30. They are rarely offered for periods over 30 years, though this may be open for negotiation depending on the circumstances of your application.
What are the alternatives to a commercial mortgage?
More immediate finance is available. A bridging loan, for instance, is designed to ‘bridge’ the gap between needing to buy a property and the sale of another asset that would otherwise fund it.
This is useful if you are buying a property at auction or under other circumstances that preclude the use of a commercial mortgage.
What APRs are offered on commercial mortgages?
An annual percentage rate (APR) is the amount of money that you will pay in interest on your loan each year, which will be quoted to you as part of your application.
Banks and lenders tend to advertise a single ‘headline’ APR rate for residential mortgages and other types of loan. This is not necessarily the rate that a borrower will secure, but it acts as a helpful guide, since at least 51 per cent of all those accepted on these contracts must be offered the headline rate.
APRs are not advertised in the same way for commercial mortgages. Lenders generally consider the variation in individual circumstances too broad to offer a single rate. In short, this means it may be difficult to predict what your APR rate will be, since it depends on your individual circumstances.
What’s the difference between fixed and variable APR?
Commercial mortgages, like other types of business loans, usually offer a choice of fixed or variable APRs.
Variable rates change according to the base interest rate set by the Bank of England. This may go up or down over the course of the agreement.
Fixed rates, however, secure a fixed, predictable rate for the whole repayment period regardless of any changes in the base rate.
Will I need to have the commercial property valued before I get a commercial mortgage?
n most cases, the property or property assets that you want a commercial mortgage on will need to be properly valued before the mortgage agreement can be secured. Commercial properties vary more than residential ones, meaning a valuation is integral to the purchase process.
The amount of money the bank will be willing to lend you will depend heavily on the outcome of this valuation.
What additional fees will I need to pay on a commercial mortgage?
There are a range of fees associated with commercial mortgages. The exact costs will depend on your personal circumstance and the mortgage provider you select.
- Legal fees: You will likely have to pay the legal fees of both yourself and the lender. These start at around £500 each.
- Valuation: As the borrower and potential buyer, you are liable for the cost of the property valuation. This may be conducted by a third party or in some cases by the lender. Expect prices to start at around £500 for a simple property, but note that these can go up much higher for more complex properties.
- Commercial mortgage broker: You may wish to explore using a specialised commercial mortgage broker to help you manage the whole purchase process. Brokers often charge a percentage fee, based on the total value of the loan.
- Stamp duty: Don’t forget you will need to pay stamp duty on your property purchase. While not a direct cost of a commercial mortgage it is a significant expense that needs to be considered when buying property.
What determines approval for commercial mortgages?
The likelihood of your approval depends on your personal circumstances – or more likely those of your business – and on the property itself.
You can check your company’s credit rating with an external agency prior to proceeding with a commercial mortgage application. As for the property itself, it’s down to the lender to decide the risk level and determine if they will lend you the funds required for purchase.