A commercial mortgage is used to purchase a business premises, such as an office or shop, rather than a residential property.
Whether you’re looking to expand your business, move away from renting your commercial accommodation to cut costs, or start investing in commercial property, there are a wide range of property types that can be bought with a commercial mortgage. This includes, but is not limited to:
Shops and retail premises
Pubs, hotels and other leisure facilities
Warehouses and factories
Farms and land
Nursing and care homes
Churches and schools
Commercial mortgages can also be used for purchases that are not property-related, but exceed the £25,000 loan threshold of a business loan, for example, buying a complete existing business, refurbishing commercial property already owned, or buying fleet vehicles, machinery and even stock.
One of the major differences with this type of mortgage is that the interest rates and the terms are decided on a case-by-case basis, so they are far more tailored to fit the applicant(s). The terms are also generally shorter than residential mortgages, 15-20 being typical, 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 for purchases intended for non-mainstream business use. You'll likely need to go through a commercial mortgage broker to access some of the more specialist lenders, however, as they 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, and the type that suits your needs will depend 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 for your own business. This might be buying a property that you’ve previously rented or purchasing a new business premises due to better suitability or expansion.
If you're a commercial landlord, you’ll need a commercial investment mortgage (sometimes referred to as commercial buy-to-let) to either buy or remortgage any 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 on owner-occupier commercial mortgages, as they’re seen as higher risk.
A semi-commercial mortgage can be used for owner-occupier or investment purposes, but this is specifically for properties with mixed use. A good example of this would be a pub or shop with residential premises above.
Lending criteria tend to be stricter with commercial mortgages compared with residential mortgages, as they are a business product. This means you'll typically need a deposit of at least 25% - although lenders are far more accepting of securing borrowing against high-value assets, such as other properties, if you hold substantial equity in them or own them outright.
Specialist lenders in this field can be more flexible, so can be useful if your business model is complex or your industry is out of the ordinary. Some high street lenders will also shy away from lending for less mainstream uses of commercial property, especially where a change of building use is required, or if they don't feel that the business use is suited to the location.
Commercial mortgage lenders use a range of factors to decide if they should lend, the loan size and the mortgage rates that will apply, such as:
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 if you plan to purchase commercial premises. They can also be cheaper than business loans, as they typically have lower interest rates.
As you can repay the mortgage over 25 years or more, the repayments can be kept affordable, and the interest you pay is tax deductible, which means you can subtract it from taxable profits. This could make it a better use of your business’ finance than renting your business accommodation.
If you've taken out a residential mortgage in the past, you’ll already be familiar with the fees associated, such as arrangement, legal and valuation fees. The same fees typically apply to commercial mortgages, however, different lenders vary in which fees they charge. The total cost of fees will either be a set fee or a percentage of the amount you’re borrowing.
Interest rates for commercial mortgage are typically more costly than you would expect to pay for a residential mortgage, and the fees can often be higher too, depending on the type of purchase.
This is a fee you pay to the lender for arranging your mortgage and can range from 0.75% to 2.5% of the loan amount. It can be added to the loan rather than being paid upfront, but you’ll end up paying interest on it for the life of the mortgage, so this is best avoided if possible.
Lenders need to determine the value of the property used to secure the mortgage (and the purchase property if these are not the same) to make sure it will provide adequate security for the loan.
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. As with most aspects of taking out a commercial mortgage, they’re likely to cost more than those for a residential mortgage and could amount to hundreds or thousands of pounds, depending on the size and type of the premises you are purchasing.
The interest rates you're offered depend on how much you borrow and a range of other factors, such as your company's finances, your level of experience, the industry in which you operate and your credit rating.
Mortgage rates for business use tend to be higher given that they are investment products, so commercial mortgages and buy-to-let mortgages, for example, charge higher rates of interest than your average non-commercial product.
Each lender has a limit of how much you can borrow, 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 company finances.
The maximum LTV (loan to value) each lender is willing to offers 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.
Lenders are likely to want to see supporting documentation, no matter what you intend to use the mortgage for. This could be a business plan and projected future income in the case of buying owner-occupier space for an expansion, or expected rental income and tenant demand if you’re investing in commercial property to let out.
Interest on commercial mortgages is charged in the same way as it is on most other mortgages, monthly on the capital that you've borrowed. However, commercial mortgages tend to be a much more bespoke loan, focused on the needs of the borrower.
Lenders calculate the interest rate available for each individual borrower, rather than having set interest rates for particular products, meaning there is sometimes room for negotiation. That said, you should expect higher rates than those offered on residential mortgage products.
As with any mortgage, the bigger the deposit you put down, the lower the interest rate is likely to be. As with any other financial product, 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.
Similarly to mortgages, this is a secured form of borrowing and will typically be secured against a property that you’re buying or already own. The interest rates tend to be higher than on commercial mortgages, 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, however, 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.
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