Commercial Mortgages – What you need to know
Whether you’re looking to buy a new building or to release equity from an existing property, a commercial mortgage can often be the best possible option. However, for many people, a commercial mortgage can present a lot of added complications in comparison to typical residential mortgages.
Because of that, we have created this simple guide to help to understand what commercial mortgages are, why you might need one, what the different types are, and what the criteria for applying for a commercial mortgage are.
What is a commercial mortgage?
In the simplest possible terms, a commercial mortgage is any loan that you take out on a property that is not your place of residence. This means that a commercial mortgage can apply to a place of business or for a residential property that you purchase for the specific purpose of renting it out.
A commercial mortgage will generally last from 3 to 25 years and it’s common to be able to find a commercial mortgage of around 60-75%, depending on the type of asset. This will depend on how much you’re borrowing in comparison to the worth of the property. If you’re taking out a mortgage on an investment property then how much you’re able to borrow will depend on factors like the estimated rental income that the property will generate. This amount will often be reduced if you’re taking out a commercial mortgage in order to buy a property for a business.
Why would you require a commercial mortgage?
A commercial mortgage will usually become necessary once you’re looking to secure funding for something beyond what a typical business loan can provide. Business loans can be unsecured up to £25,000 but beyond that lenders require security in order to reduce their risk.
You may also want to use a commercial mortgage to release equity from an existing rental or business property so that you can use it to invest that equity into other properties or even invest it back into improvements on the existing property.
What types of commercial mortgages are there?
You can typically divide commercial mortgage loans into two categories:
Owner-occupier mortgages: These are used to buy properties that are going to be used as the trading premises for a business like an office building or retail space.
Commercial investment mortgages: These are used for properties that you intend to let out either to another business or to a residential tenant.
There are also commercial mortgages available for the development of a property. Lenders typically prefer to provide these mortgages to those who have experience in property development so that is an important factor to keep in mind.
The rates for commercial mortgages fall into either the category of a fixed rate or variable rate.
Fixed rate commercial mortgages are for a set period of time before either being renegotiated or reverting back to the variable rate. This time period can vary to any point between two years and the end of the loan itself. The trade-off for a fixed rate is that they often end up being slightly higher than variable rates.
Variable rates are dependent on the Bank of England base rate. Lenders price fixed mortgage loan rates on individual merits and they are unable to advise value or reasonable mortgage rates.
What is the difference between a commercial and residential mortgage?
One major difference between a commercial mortgage and a residential mortgage is that the rates are often not standardised. Instead, each rate is priced on an individual basis in order to match the strength of the proposal.
Another difference is that the feeds for commercial mortgages are often a little more straightforward than they are for residential properties. A commercial mortgage will be subject to a lender arrangement fee, valuation fee, legal fees, and broker fees. Due to the complexity of the purchase of commercial properties, there may be a higher legal cost involved than there would be for the purchase of a residential property.
How do you apply?
The first step in applying for a commercial mortgage is to make sure that you are eligible and fit the criteria to do so. In order to find out whether you are eligible, you will need to provide the following:
Three full years’ audited or certified accounts plus current management figures, if produced.
Two months’ bank statements.
Assets and liabilities statement.
Again, the rates that you receive will often be highly dependent on the kind of commercial mortgage that you’re applying for as well as the proposal that you present. Without the right information to prove that you’re eligible, you won’t be able to apply for a commercial mortgage in the first place.
It’s important to make sure that you have all of the information that you need before approaching any lender with your proposal. The key is to try and make sure that you find the best rate and terms possible.
What else do you need to know?
Remember that the time comes for you to apply for a business mortgage when you are looking to borrow amounts of over £25,000. Until £25,000 a business loan is unsecured but beyond that point, lenders require a degree of security in order to offset the risks involved.
A commercial mortgage will often offer fixed-rate terms from 1 to 10 years. After that, the rate will need to either be renegotiated with your lender or it will revert back to a variable rate. Products are also available which are linked to the Bank of England (BOE) base rate. These can sometimes work out cheaper than a fixed rate option.
Alongside the fees previously mentioned here, you should also be aware that repayment fees may apply if you repay all or part of your loan before the expiry of the agreed term.
The costs of lending fees and associated borrowing costs apply and can be added to the loan, making it far easier to manage those costs when looking to purchase any commercial property.
For fixed-rate loans, if you decide to pay or cancel the fixed interest rate you may have to pay breakage cost in addition to the various other fees involved such as prepayment fees, legal fees, and broker fees.