A commercial mortgage is a type of loan that is secured using a business premises.
There are no off-the-shelf options so you can’t apply online or compare rates easily. Instead the details of your mortgage will be shaped by your budget, building and business type.
To help you find the best products, rates and the most suitable lender, you can use a specialist commercial mortgage advisor.
Typically, commercial mortgages are used when business loans have finished.
These mortgages are a way for businesses to borrow over a certain amount – say £25,000 – with the lender using your business property as security.
A commercial mortgage, sometimes called a business mortgage, acts as a medium to long-term loan that generally spans between three and 25 years.
To start with, most lenders will require you to have a deposit of between 25% to 50%. And the maximum amount you can usually borrow, the loan-to-value (LTV) ratio, is 75% of the value of your business property.
For example, say you have a commercial property that’s worth up to £300,000, your maximum LTV ratio would be 75% of that amount. So you could apply for a commercial mortgage of up to £225,000, and you’d need to provide a deposit amount between £56,250 to £112,500.
You can use a commercial mortgage in several ways to benefit your business, including:
Unlike a residential mortgage, with a commercial mortgage there are usually no fixed rates.
Instead, your rate will depend on how much your loan is and the period of time you want to pay it back, along with some other factors your lender will take into account.
Lenders view commercial mortgages as higher risk compared to home mortgages, so you’ll normally be asked to pay higher interest rates.
But you’ll usually find commercial mortgages offer better interest rates than regular business loans. This is because the lender is using your commercial property as security, in case you’re unable to pay back the loan.
There are two main types of commercial mortgage:
This type of commercial mortgage is used to purchase property that will be used by your business to trade from.
You can use this loan to buy the premises your business is already using, or for purchasing new property to move in to.
This loan can be used if you want to buy property as an investment - for example, to rent out. If the property is residential, you’ll need a buy-to-let commercial mortgage.
You can also take out a business mortgage to invest in semi-commercial, mixed-use property that has both commercial and residential use - for example, a shop with flats above it.
This will depend on your budget, the property that you have and your business.
Different lenders specialise in lending to different types of business, so it’s worth investigating what options are available.
Working out which commercial mortgage and lender might suit your needs best can be something of a minefield, especially if you haven’t been trading for long, so it can be a good idea to use a specialist commercial mortgage broker.
Using their expertise, brokers can help you find the highest loan to value ratio, advise on what documentation you need and take the pain out of the application process.
A good place to find a commercial mortgage advisor is the National Association of Commercial Finance Brokers.
Because all brokers charge slightly differently, make sure you understand their fee structure before you start.
There are several advantages to taking out a commercial mortgage on your own business premises:
If you want to find out more about whether a commercial mortgage will work for your business, it’s worth speaking to a specialist in this type of business loan.
When you take out a commercial mortgage there are a number of fees you’ll have to pay. Typically these include:
You pay this fee to the commercial mortgage lender for arranging the loan. It can often be added to your loan and is generally between 0.75% to 2% of the loan amount. If you choose to add it to your mortgage, you’ll be paying interest on this amount over the mortgage term.
This pays for the lender to send a valuer to visit the property and assess its worth. Costs are often higher than valuation fees for residential properties, as the valuer has to take more things into account such as rental yield and marketability. Fees can start from a few hundred pounds.
These can vary a lot depending on the solicitor you choose. Fees tend to start from around a few hundred pounds and you’ll need to pay the lender’s legal fees too.
A specialist commercial mortgage broker can help you find the best deal and will present your application to the lender to increase its likelihood of being accepted. Their fee is normally up to 1% of the value of the loan.
You might want to consider:
There are several ways you can finance your business aside from a commercial mortgage. Some don’t need property as collateral which might be a more viable option.
This is a short-term loan usually lasting up to one year, to bridge a financial gap and provide immediate cash flow. It can be arranged quickly but is secured against your property. Interest rates tend to be high and loans start from around £25,000.
Usually for when you need amounts below £25,000. These loans can be used to cover a variety of costs but you’re normally required to pay them back within 18 months.
Loans between £1,000 and £25,000 can be used to help fund your business. But before applying, check that your lender will allow you to use it for business purposes.
Using a specialist broker can help you to find the best lender and mortgage option for your business and help you to manage the process.
When you apply for a commercial mortgage, you’ll find it’s similar to applying for a home mortgage. You’ll need to provide:
A completed commercial mortgage application form
Proof of identity, address, and income
An assets and liabilities statement
Two months’ or more of bank statements
Three full years of audited certified financial accounts
Details of the property
Details of lease or tenancy agreements
A business plan - some lenders ask for this to decide how likely it is that you’ll be able to pay off the loan.
PLEASE NOTE: THE FCA DOES NOT REGULATE MOST COMMERCIAL MORTGAGES
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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