If your industry requires a separate base of operations or storage, or if you are looking to buy a business that includes a property, you’ll likely need a commercial mortgage. Among other things, these can also be utilised to release equity from existing properties. Discover everything that you need to know about how to get a commercial mortgage in this guide.
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What are commercial mortgages?
Commercial mortgages are loans that can be used to buy property, an existing business or land for business use. The key difference between a regular business loan and a commercial mortgage is the available funding. Business loans give access to up to £250,000 whereas commercial mortgages allow businesses to borrow from £50,000 up to £25,000,000 to buy properties or land.
You usually borrow this money from a bank or lender and pay it back in monthly instalments over a set period of time, similar to a residential mortgage. It is also common that residential mortgages have a term of between 3 and 25 years, and a deposit of 20% to 40% will be required.
What are the types of commercial mortgages?
The two most common types of commercial mortgages are owner occupied and commercial investment mortgages.
Owner Occupied
As the name suggests, these mortgages are commonplace when the business will be using the mortgaged property as a main base of operations or an additional space occupied by the business.
Commercial Investment Mortgages
This is similar to a residential buy-to-let mortgage and is usually the better option for those looking to buy a property as an investment and rent it out to other businesses. It is worth noting that commercial investment mortgages cannot be used for residential mortgages.
When do you need a commercial mortgage?
In most cases you’ll need a commercial mortgage if you’re looking to buy the current commercial property you are renting, or if you want to buy additional property for an extra office or land to develop.
They can also be used for investors who are looking to buy property to lease to other businesses (or even several properties under one commercial mortgage to rent out to multiple tenants).
Who can get a commercial mortgage?
You’ll have the best chance at getting a commercial mortgage when you have a strong business credit score and your business is in good financial condition. Typically, lenders will decide suitability based on a number of factors, including your business's projected income, cash flow, debts owed and any rental income that your business yields.
How hard is it to get a commercial mortgage - what are the eligibility criteria?
If you have good credit history and a good business financial history, it should be straightforward to get a commercial mortgage as long as the following requirements are met.
Sufficient sector experience and expertise can be demonstrated.
A deposit/contribution of 20% to 40% of the value of the business or property you plan to purchase is available.
The business has demonstrable proof of repayment through historic accounts, financial forecasts or an in-depth business plan.
If you are looking to buy property to start your business, a larger deposit will be required as there is less proof of repayment for the lender to use. For example, if you have no trading history, it’s typical that lenders will require a 50% deposit, but it is possible to use another property that you own instead of cash towards the purchase.
If you are an existing business, lenders will look into your trading history. You’ll typically need around 3 years of financial accounts to be considered by high street banks, but for Tier 2 and Tier 3 lenders one full year of accounts will be required.
What are the features of a commercial mortgage?
The main features of a commercial mortgage are:
More desirable interest rates than unsecured business loans as the loan is secured against some form of property(thus reducing risk for the lender if payments are missed).
Terms are usually between 3 years and 25 years.
Frequently have variable interest rates, although fixed rates are usually available.
How does a commercial mortgage benefit your business?
When you’re looking into a commercial mortgage it is vital to consider how it can benefit your business by aiding growth, and reducing the cashflow pressure of purchasing a commercial property.
It allows the purchase of a new buy to let property and bypass paying rent.
The cost of a new business or property purchase can be spread over a defined term ranging from 3 years to 25 years.
When you own a property you can rent out part or all of it to earn additional rental income.
Properties are seen as relatively safe long-term investments. So you will likely gain an asset that appreciates over time as you pay it off.
Commercial mortgage rates are usually lower than that of standard business loans.
It can be more tax efficient as you are allowed to expense the interest you pay on the property.
You will be able to borrow anywhere from £50,000 to £25,000,000 depending on your circumstances.
If you no longer need or want the property, selling the asset can be much easier than leaving a commercial lease agreement.
Monthly repayments can be cheaper than rental costs.
What is the application process like for a commercial mortgage?
During the process you will be asked to provide a series of information to the lender, this is to ascertain how much you are eligible to borrow and if you would be viable to repay the loan.
You’ll likely need to supply 3 to 6 months of business bank account statements to assess your creditworthiness and business cash flow. You’ll need to supply information on any assets and liabilities, along with your income and spending as a business. You’ll be asked to provide sufficient proof of identity and address (similar to a residential mortgage application).
How do you pay interest on a commercial mortgage?
Another element that is similar to that of a commercial mortgage is the interest payments. Whether you’re on a fixed or variable rate it will be added on to your regular repayments each month for the duration of your loan period, unless you are on an interest only mortgage agreement.
Interest is impacted by a number of factors, including:
The amount you loan.
Your credit history.
The type of lender you use.
The size of your deposit.
It is also important to note that owner occupied commercial mortgage rates are usually cheaper than that of investment commercial mortgages as investment properties are deemed slightly high risk.
What are the fees for a commercial mortgage?
There are 5 main types of fees that you will usually incur with a commercial mortgage, these are as follows.
Arrangement fees
Arrangement fees are paid to the lender for their services in the loan arrangement. These are usually between 0.5% and 2.5% of the amount you borrow. This fee can also be added to the total mortgage repayments and paid over the mortgage term.
What does that look like?
In this example, a Tech company is looking to expand and buy a new office space worth £1,000,000 and they have a 40% deposit of £400,000. So they need to borrow £600,000, in this case, the arrangement fee is 1% which works out to £6,000.
Valuation fees
During the mortgage process your lender will organise for a valuer to visit the property and value it. This cost is usually in excess of £1,000 + VAT on a simple valuation. However, if the property you are looking at is considerable in size or has more intricacies then the cost will rise.
Broker fees
Most brokers for commercial mortgages will charge a fee, but those that don’t usually only work with lenders that provide them with a large introducer fee (which can limit the rates available to you). At Approved we work with over 125 specialist lenders so we can help your financial needs no matter your situation while providing low rates thanks to our strong relationships with our network of lenders.
Stamp duty
Similar to that of a residential mortgage, stamp duty will be required when purchasing a commercial property. The rate of stamp duty that you pay is impacted by the location of the property and its purchase price.
England & Northern Ireland
Up to £150,000 = 0%
£150,001 to £250,000 = 2%
The portion above £250,000 = 5%
Wales
Up to and including £225,000 is 0%
Over £225,00 up to and including £250,000 is 1%
Portion above £250,000 up to and including £1,000,000 is 5%
Portion over £1,000,000 is 6%
Scotland
Up to £150,000 is 0%
£150,001 to £250,000 is 1%
The portion above £250,000 is 5%
Solicitor & legal fees
When getting a commercial mortgage you will need to pay your own legal fees and the lender’s legal fees. These fees can be accrued from complex legal work, insurance, surveyor fees and the preparation of legal documents. Fees tend to start at around £500 to £1,000, but depending on the legal work involved with getting your mortgage to completion they can exceed this.
What are the alternatives to commercial mortgages?
If reading this article has led you to decide that a commercial mortgage might not be for you, it is important that you consider the alternatives that are available to you and your business.
Bridging loans are short term solutions to help ‘bridge’ the financial gap between purchasing or renovating commercial properties. It allows for quick access to capital usually secured against the property itself, helping borrowers to capitalise on growth opportunities without having to arrange and wait for long term financing.
Short-term loans
Enable you to access funds without making long term commitments. It is common that they are used for financial alleviation to cover working capital, cash flow or unexpected expenses.
Allow you to lend money without the need for collateral against an asset. It may involve a personal guarantee for more assurance, borrowers also have the option to terminate the agreement at any time after providing notice to the financier and settling the outstanding amount. At the term's conclusion, ownership of purchased goods remains with the borrower, or if the funds were utilised for cash flow purposes, no additional payments are necessary.
Conclusion
In this guide, we have taken you through the process of how to get a commercial mortgage, and highlighted the key features and common pain points to help you get ahead. If you have any more questions, Contact our experts for support and advice.
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