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Commercial mortgages are used to purchase business premises', rather than residential properties. There are a wide range of properties that can be bought with a commercial mortgage, including, but is not limited to:
Shops and other retail premises
Pubs, hotels and other leisure facilities
Warehouses and factories
Farms and land
Nursing and care homes
Schools and other child care facilities
Commercial mortgages can also be used for non property-related business costs that exceed the £25,000 loan threshold of a business loan. For example:
Buying an existing business
Refurbishing commercial property already owned
Buying fleet vehicles, machinery or stock
One of the major differences with this type of mortgage is that they are tailored to the individual, rather than being fixed products. The interest rates and the terms are decided on a case-by-case basis, and the terms are generally shorter than residential mortgages - Typically 15-20 years, but they can be as long as 40 years.
High street lenders can be more restrictive with commercial lending, so specialist lenders may be needed if your purchase is for non-mainstream business use. A commercial mortgage broker can help you to access some of the more specialist lenders, which are not always accessible to the general public.
You can also remortgage a commercial property that you already own with a commercial mortgage, either to get better terms or to release equity to invest elsewhere.
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There are three main types of commercial mortgage, depending on what you intend to do with the property you’re buying or remortgaging.
Owner-occupier commercial mortgages are used for premises that you intend to use to carry out business through your own company. This might include buying a property that you’ve previously rented or purchasing a new business premises due to better suitability or expansion.
You’ll need a commercial investment mortgage (sometimes referred to as commercial buy-to-let) to either buy or remortgage a property that you’re planning to let out to another business. This could be an office block let to a number of different businesses or a factory/warehouse let to a single business, for example.
The rates tend to be more expensive on commercial investment mortgages than owner-occupier commercial mortgages, as they’re seen as higher risk.
A semi-commercial mortgage is specifically intended for properties with mixed use. A good example of this is the purchase of a pub or shop with residential premises above.
Lending criteria tend to be stricter for commercial mortgages compared with residential mortgages. You'll typically need a deposit of at least 25% - although lenders are generally more flexible if you can secure borrowing against high-value assets, such as other properties you hold substantial equity in or own outright.
Specialist lenders can be more flexible if your business model is complex or your industry is out of the ordinary. Some high street lenders will shy away from lending for less mainstream uses of commercial property. This is especially true if a change of building use is required, or if they feel that the business is unsuitable for the location.
Commercial mortgage lenders use a range of factors to determine your suitability to borrow, the loan size they can offer you and the mortgage rates offered. This may include any or all of the following, but criteria vary between lenders:
The profitability of your business - you will usually need to provide a detailed business plan detailing intended use of the loan and how you will afford the repayments
Your credit rating - this could be looked at for the business and/or the director(s) of the company
The property on which the loan is secured - including leasehold length remaining
Potential rental income (in the case of a commercial investment mortgage)
Your assets and liabilities statement - if using assets as security
Commercial mortgages let you borrow larger amounts of money than business loans, so are typically essential to purchase commercial premises
Generally have lower interest rates than traditional business loans
You can repay the mortgage over 25 years or more, keeping repayments affordable
The interest you pay on the mortgage is tax deductible, so can be subtracted from taxable profits
Could make better use of your business’ finance than renting business accommodation
Fees are similar to those associated with residential mortgages, such as arrangement, legal and valuation fees. Lenders vary in which fees they charge and whether they charge them as a set fee or a percentage of the amount you’re borrowing.
Interest rates for commercial mortgage are typically higher than residential mortgage rates, and the fees can often be higher too, depending on the type of purchase.
Arrangement fees can range from 0.75% to 2.5% of the loan amount. This can be added to the loan, but you’ll pay interest on it for the life of the mortgage if you do, so this is best avoided if possible.
Valuation fees tend to be higher than they are for residential mortgages – valuing a commercial property is more complex as factors such as the location of the property and its potential to earn income for the business need to be considered.
As well as paying fees to your own solicitor for the legal work involved, you usually need to pay the lender’s legal fees too. They’re likely to cost more than residential legal fees and could be thousands of pounds, depending on the size and type of the premises you purchase.
The interest rates offered are higher than your average non-commercial product and bespoke to your circumstances, so will depend on:
How much you borrow
Your company's finances
Your level of experience
Your credit rating - potentially business and personal credit history
Each lender has a maximum loan limit, and this could range from £50,000 all the way up to £25 million, depending on business need and the affordability and stability of your business finances.
The maximum LTV (loan to value) each lender is willing to offer will vary depending on the type of commercial mortgage and the type of property you plan to buy. 70-75% LTV is a typical maximum loan size for owner-occupier properties and around 65% LTV for investment properties.
Interest on commercial mortgages is charged monthly on the capital that you've borrowed.
Lenders calculate the interest rate for each individual borrower, rather than having set interest rates for particular products, so there is sometimes room for negotiation. That said, you should expect to pay higher than the average residential mortgage rates
As with any mortgage, the bigger the deposit you put down, the lower the interest rate is likely to be. Costs will also vary from lender to lender. To get the best commercial mortgage rates, it's a good idea to speak to a broker with experience in the sector.
Commercial mortgage rates are largely variable, so can rise and fall in line with base rate changes. It’s sometimes possible to get fixed-rate deals on loans of £500,000 or less, however.
You can get a commercial mortgage for a range of property types, including:
shops and retail premises
pubs and hotels
buy-to-let investment properties
warehouses and factories
farms and land
schools and hospitals
Leisure centres or gyms
A commercial mortgage can be obtained in your own name or be held by a:
Limited liability partnership (LLP)
SPV (special purpose vehicle)
There are a few alternatives to commercial mortgages, however, whether they are fit for purpose will depend on how much you need to borrow, what you need to borrow the money for, and how long you need to repay it over.
The following alternative business finance options may be suitable in certain circumstances:
A bridging loan is a much shorter term finance option and is usually borrowed over a period of 12-36 months. They are much quicker to arrange than commercial mortgages, so are often used to purchase property at auction, in order to meet the 28 day payment terms.
They are a secured form of borrowing and will typically be secured against the property that you’re buying or one that you already own. The interest rates are usually higher than commercial mortgage rates, and interest is charged monthly, rather than annually.
As a short term business loan is unsecured, you will typically only be able to borrow a maximum of £25,000. It’s quicker and easier to arrange than a commercial mortgage, but the interest rates are higher.
It’s sometimes possible to use personal loans for business use, although you would have to make this intention clear to the lender on application. Personal loans are not secured and can have lower interest rates than business loans. This may be a viable option for newer businesses with less trading history, however, the maximum loan size will usually be £25,000.
Commercial mortgages are usually set at higher interest rates than non-commercial products, but there's still plenty of competition between lenders. A mortgage broker can help you access the best rates available to your business, and can often access deals not available to the general public”Kellie Steed, Mortgage Content Writer
A commercial mortgage allows you to buy or remortgage property that will be used for business purposes - either your own business operations or as a investment business premises.
A residential mortgage is simply for buying or remortgaging a property you intend to live in.
No, unlike residential mortgages, commercial mortgages are not regulated by the Financial Conduct Authority (FCA) as borrowers are seen as less vulnerable. This means lenders have more flexibility in how much they can lend.
Yes, this is sometimes referred to as a commercial investment mortgage, and is used to purchase commercial property to let out to other businesses.
It’s also possible to get a semi-commercial investment mortgage, which is used to purchase properties that have both commercial and residential elements.
Yes, it’s possible to get both interest-only and repayment commercial mortgages. As with any interest-only mortgage, you'll need to demonstrate to the lender how you will repay the capital (amount borrowed) at the end of the loan term.
Yes you can remortgage a commercial property. Commercial mortgage providers offer both purchase and remortgage products. Like residential remortgages, this will be easier if you have substantial equity available.