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Commercial mortgages
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What is a commercial mortgage?
A commercial mortgage is one secured on business premises, such as an office or shop, rather than a residential property. They are available from both high street banks and specialist lenders, and you can apply for them by going either directly to the lender or through a commercial mortgage broker.
As with a residential mortgage, you make monthly repayments to the lender, usually over a term of between one and 25 years. However, unlike residential mortgages, commercial mortgages are not off-the-shelf products – the interest rate and the terms are decided on a case-by-case basis for each borrower.
What are commercial mortgages used for?
A commercial mortgage lets you buy a property either to use for your business or rent out as an investment; it’s not for a property you intend to live in.
You may want to buy business premises because your company is expanding and you want to stop renting or because you need bigger premises. Or, you may decide you want to start investing in commercial property.
You can also remortgage a property you already own with a commercial mortgage to get better terms or release equity that you can invest elsewhere.
How to apply for a commercial mortgage
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What types of commercial mortgages are there?
There are two main types of commercial mortgage depending on what you intend to do with the property you’re buying or remortgaging.
Owner-occupier mortgages
Owner-occupier commercial mortgages are used for premises from which you intend to operate your business. You may be buying a property you’ve previously rented or purchasing a new business location. Owner-occupier mortgages are the equivalent of residential mortgages that you use to buy your own home.
Commercial investment mortgages
These mortgages are for buying or remortgaging a commercial property that you’re letting out as an investment. You might want to buy an office block to let to a number of different businesses or a factory to let to one business. These tend to be more expensive than owner-occupier mortgages as they’re seen as higher risk.
Benefits of taking out a commercial mortgage
Commercial mortgages let you borrow larger amounts of money than business loans, which are usually only for borrowing £25,000 or less, at lower interest rates. As you repay the mortgage over 25 years or more repayments can be kept affordable, and the interest you pay is tax deductible, which means you can subtract it from taxable profits.
Commercial mortgages are a cheaper way to borrow than using short-term finance such as bridging loans, which are also secured on property but usually designed to be paid back within 12 months. They are used to bridge a funding gap, such as when you want to buy a new property but haven’t yet sold your existing one.
Eligibility and criteria for taking out a commercial mortgage
Lending criteria tend to be stricter with commercial mortgages compared with residential mortgages, meaning you'll usually need a deposit of at least 25%. You may be able to borrow more if you can offer additional assets, such as another property you own, as security. The bigger the deposit you put down, the lower the interest rate is likely to be though.
The interest rate and the amount you can borrow are unique to each borrower and depend on a range of factors such as the profitability of your business, your credit rating, your industry experience and the property on which the loan is secured. With a commercial investment mortgage, the lender will also look at the rental income you’re likely to get.
What fees are involved with commercial mortgages?
If you've taken out a residential mortgage, you’ll already be familiar with the fees associated with them, such as arrangement and valuation fees. The same fees are typically applied to commercial mortgages. Different lenders vary in which fees they charge. The amount will either be a set fee or a percentage of the amount you’re borrowing.
Arrangement fees
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, but you’ll end up paying interest on it for the life of the mortgage, so this is best avoided if possible.
Valuation fees
Lenders need to value the property used to secure the mortgage to make sure it will provide adequate security for the loan. Valuation fees tend to be higher than for residential mortgages – valuing a commercial property is more complex as factors such as the location of the property and its potential for income need to be considered.
Legal fees
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.
Interest rates
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. Interest rates can be fixed or variable tend to be higher for commercial mortgages than for residential ones.
What properties could I buy with a commercial mortgage?
You can get a commercial mortgage for a range of property types, including:
shops and retail premises
office buildings
pubs and hotels
buy-to-let investment properties
warehouses and factories
farms and land
What types of companies can get a commercial mortgage?
A commercial mortgage can be obtained in your own name or be held by a:
limited company
limited liability partnership (LLP)
SPV (special purpose vehicle)
SIPP/SSAS
trust
offshore company
How much can I borrow on a commercial mortgage?
You can borrow between £50,000 and £25 million with a commercial mortgage, although some lenders have no set maximum. The amount a mortgage provider will lend you depends on how much you can afford to pay back and factors such as the track record of your business or the rent you expect to get if you’re letting the property.
How do interest rates on commercial mortgages work?
Depending on your business, you could be offered an interest-only mortgage, where you only pay off the interest during the term, or a repayment mortgage, where you pay off both the interest and some of the capital each month. You may also be able to “roll up” the interest, which means you pay all the interest and capital off at the end of the term.
Claire FlynnCommercial mortgages can help your business buy property. The exact deal you get can have a big impact on your bottom line, so it’s really worth seeking expert advice”
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