Commercial Mortgages

What is a commercial mortgage?

Commercial mortgages are loans secured on properties that won’t be your main residence, otherwise known as a non-residential property. Some examples of property types that commercial mortgages are used on include:

• Buy-to-Let properties
• An office
• A shop or restaurant
• Land to be used for property development
• A factory or warehouse

Depending on the type of property and lender, you can usually borrow between 60% to 75% of the property’s value. This means you will need to put down anywhere from 25% to 40% deposit.

Similar to a residential mortgage, term lengths on these mortgages can range between 5–30 years, whether this be an initial purchase or remortgage. During this period you will make monthly repayments to your lender.

If you are unable to make payments, your lender is able to repossess the property, as it is used as collateral for the loan, just like it would be with a residential mortgage.

What are the different types of commercial mortgages?

Generally, commercial property mortgages fall into two main categories:

Benefits of a commercial mortgage

A commercial mortgage typically offers better interest rates than business loans. This is due to the security of the property the lender has in the event of default.

Below are some benefits of taking out a commercial mortgage:

• Potential for capital growth: like a lot of property, commercial property often will appreciate in value over time.
• Tax-deductible interest: the interest you pay on a commercial mortgage is often tax-deductible, reducing your overall tax burden.
• Rental income: if you choose to obtain a mortgage on a rental property, you will receive rental income from this.

Costs involved with commercial mortgages

• Valuation fee: This is a fee so the lender can appoint a valuer to visit the property to ensure it is suitable security. These tend to be higher than residential properties as the valuer has to take many factors into account, such as rental yields and future marketability.
• Arrangement fees: an arrangement fee is a cost for the mortgage to be set up and put together. It is typically between 0.75% and 2% of the loan amount and can usually be added onto the mortgage. If you choose this option, be aware that you will pay interest on this amount over the mortgage term.
• Legal Fees: Legal fees can vary a lot in cost depending on your chosen solicitor – typically, fees would be anything between £800– We have relationships with a number of solicitors and will be happy to give you a quote on how much you might pay.
• Broker fees: these fees will vary from one broker to the next – some brokers charge a flat fee while others require a small percentage of the total loan amount. A broker like us will be able to present your application to the lender in the best light, giving you the best chance of success.

Will you qualify for a commercial mortgage?

Understanding what lenders will look at during the application process is key and it will allow you to prepare, knowing you have put yourself in the best position to be offered a mortgage.

Commercial mortgage lenders will need to assess both the viability of the business and your ability to pay the mortgage. To do so they may ask for various information to confirm this, such as:

• Assess your current assets and liabilities.
• The business’s cash flow statement, including any debts the company has.
• A projection of the company’s income/expenditure.
• Proof of funds to cover the deposit, this is usually proved through bank statements.
• 3 months’ personal and business bank statements to assess cash flow.
• Identification and address verification, typically a passport and utility bill date in the past 3 months.

Each lender and application will require different things because everyone’s circumstances and requirements are different. If you want to discuss what you will need for an application, feel free to reach out today and one of our expert commercial mortgage brokers will be happy to help.

Commercial mortgage interest rates

Like with residential mortgages, commercial mortgage rates can vary depending on the products you choose. The most common interest rate types you can have are fixed or variable rate products.

A variable rate products interest rate will be guided by the changing interest rates in the economy, therefore the rate can change. This means that your monthly payment can both increase and decrease, depending on the economy. Commonly, lenders will use the Bank of England base rate as a guide to base the rate of their products on.

Fixed rate products are essentially the opposite – they are where the interest rate on the product are fixed for a set period of time. This means your monthly mortgage payment will remain the same every month, as the interest rate will not change. Fixed rate products typically last anywhere from 2 to 5 years.

On top of this, you can also obtain interest-only mortgage products. These are mortgages in which you only repay the interest, then at the end of the term the full loan amount will need to be repaid. These products are very popular with Buy-to-Let landlords, as it allows them to keep monthly costs low and maximise rental yields.

Development finance

If you are planning to undertake a building project, it’s imperative that you make the right choices as to the finance. Development finance is a loan that is used to fund a project such as:

• Developing a piece of land into a number of dwellings
• Converting an existing building into an apartment block
• Refurbishment of an existing property
• Regeneration project

With property finance, a lender may offer between 70–80% of the build cost, which leaves a fair amount needed by the developer. The term of development finance is typically offered between 6 months–2 years, with a suitable exit plan.

If you already own the land or building outright, it may be possible to obtain 100% development finance. In this case, the lender will value the asset and will offer funds based upon the security.