A commercial mortgage is a loan for buying (or refinancing) land or a property that’s to be used for business purposes. But they’re very different from a personal mortgage for your home.
For example, there are no off-the-shelf products available, so you can't apply online or compare rates as easily.
Tight commercial lending - due to stricter affordability testing - could impact the speed and even success of your commercial mortgage application.
- A commercial mortgage is a loan for business purposes
- Most lenders will require a substantial deposit of at least 20-30%
- Speak to a commercial mortgage adviser for tailored advice on your business's needs
What type of commercial mortgage do I need?
The most suitable commercial mortgage for you will be shaped by your budget, building and business type.
That way, the mortgage will be specific to your company's circumstances.
Talk to a specialist commercial mortgage advisor. They’ll be able to tell you whether a lender is likely to accept your application for a commercial mortgage based on your situation. They’ll find the products and rates that best suit your circumstances.
A good place to find a commercial mortgage advisor is the National Association of Commercial Finance Brokers.
Types of commercial mortgages
There are generally two types of commercial mortgage:
- Owner-occupied - for buying the premises where you already operate, or purchasing new premises for your business to move in to
- Commercial buy-to-let - for buying premises in order to let them out to another business
The lending criteria for each type of mortgage will vary, as will the length of the lending period.
Most commercial mortgage lenders won't consider anything that's for less than three years, so you should look at other forms of commercial finance if you need a relatively short-term loan.
A commercial mortgage means a loan for buying (or refinancing) land or a property that’s to be used for business purposes
Most commercial mortgages can be arranged for up to 25 years, although this can vary hugely depending on the business circumstances.
For tailored advice on commercial mortgages, speak to a broker to find a lender that works with your industry and specific circumstances.
Interest rates and fees on commercial mortgages
You're likely to be offered a higher rate of interest, and potentially higher fees, to reflect the increased risk of lending to a business rather than an individual.
If you can come up with a large mortgage deposit, you'll appear less risky and may get better deals.
A deposit of less than 20% could mean you pay a much higher rate. Many lenders insist on a minimum deposit of 30%.
There are some lenders who offer as much as 100% loan-to-value (LTV), but you're likely to pay a much higher rate if you need a deal like that. You'd probably also have to use another property – such as your own home – as security.
With any commercial mortgage, there may be arrangement fees, valuation fees, and probably an early redemption charge or penalty if you decide to end the mortgage before the agreed term.
There are commercial mortgages available for almost every type of viable business, even relatively new ones.
Commercial mortgage criteria
Your application for a commercial mortgage will depend on many different factors.
All lenders will want to look at your business accounts, profit projections and the property value, but some may also want to look at your personal finances too.
They do this to assess your affordability - whether or not you can afford the monthly repayments.
Did you know...?
- A business loan might be an alternative to a commercial mortgage if you need to borrow less than £25,000
Don't assume that an adverse credit history will completely bar you from a commercial mortgage, but it could mean the best deals aren't available to you.
If you want a commercial mortgage for a property on a leasehold then the lender will want to see that there's a long period left to run.
Alternatives to a commercial mortgage
If you only need a relatively small amount of cash – below £25,000 for example – you may be better off looking at a business loan.
These are typically unsecured, although the lender will also want to see information on your company's income and projections.
Most commercial mortgage providers have a minimum amount they're willing to lend and a minimum period, as there’s lots of work involved in setting up such a contract.
It's a good idea to speak to an adviser or broker so you can be clear on whether a business loan, bridging loan or commercial mortgage is the best option for you.
Commercial mortgages for shops or restaurants
It's possible to get a mortgage if you want to open a shop, restaurant or cafe. But, again, the lender will need to see an extensive amount of information – including business accounts and projections.
Small businesses like shops and restaurants are a key pool of customers for commercial mortgages, but some lenders are happier lending to these businesses than others.
If you need funds to fit out the new business then a business loan may be more appropriate.
If you plan to live above your shop, pub or restaurant then that can also complicate your mortgage needs. Involve a mortgage adviser at the early stages of your planning.
By Felicity Hannah
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