Commercial Mortgages Guide – Mortgage for commercial property
Commercial mortgages are a complex process and there are many things to consider when deciding whether it is the best choice for you and your business. This guide will help you understand the process and some of the requirements involved.
What is a commercial mortgage?
A commercial mortgage is a loan secured on a commercial property, such as a retail unit, warehouse or office block. The proceeds from commercial finance are often used to buy, refinance or redevelop a commercial property.
Commercial mortgage types
There are various types of commercial mortgages available:
Commercial owner occupier mortgages
Commercial owner occupiers’ mortgages (also known as business mortgages) are intended for companies and individuals buying or re-mortgaging the premises from which they operate; either freehold or long leasehold. Commercial owner occupiers’ mortgages are also obtainable on some mixed-use properties or semi-commercial properties including shops with flats above, which are classed as part commercial/part residential.
Commercial investment mortgages
Commercial investment mortgages are considered for companies and individuals wanting to buy or re-mortgage a commercial property to let out, meaning they profit from the rental income and the property value hopefully increasing. Commercial investment mortgages are also offered on semi-commercial and mixed-use properties.
Commercial buy to let mortgages
Commercial buy to let mortgages are similar to residential buy to let mortgages with the main difference being that you will look to purchase a commercial property via your company and then rent it out to another business. A commercial buy to let lender will look at different factors as commercial properties are generally more difficult to let out than residential properties.
Commercial mortgage on a leasehold
It is possible to obtain a commercial mortgage on a leasehold but generally, the lease has to have at least 70 years remaining (this may differ according to different lenders). If not, it could be considered but you may need to provide additional security.
Lending criteria – What information the lender will need
Most commercial lenders will need information on the client, business and property. It is always worth preparing to obtain the required documents at the outset of your application to ensure it runs smoothly.
You should always factor in that the main apprehensions of any commercial lender will be whether your business can realistically afford to repay the loan. They will also need to consider whether the value of the commercial property is enough to cover the loan amount requested.
Some of the information that commercial lenders may ask for include:
- Audited accounts for the last two/three years
- A profit and loss forecast from an accountant
- Asset and liability statements
- The personal details of the key individuals in the business
- The credit status/score of the business
- How the current business is performing and growth projections
- A business plan
- Information on how the property will subsidise your cash flow
- How the commercial loan will be repaid
- Details of any personal investments involved
This is not a definitive list and therefore it is worth remembering that each lender will have different criteria.
How much can I borrow?
For owner-occupied commercial mortgages, you can request loans amounts of up to between 70 and 75% of the value of the property. If it is a commercial investment mortgage then the amount available to borrow will be calculated by the rental income achieved by the investment property.
Commercial mortgage lengths
Commercial mortgage lengths can range from 3 to 25 years. You will also find that shorter-term finance is available via a property development loan or bridging loan. These often have terms of a few weeks up to 24 months.
Commercial mortgage rates
Commercial mortgage rates are not consistent in the same way as residential mortgages. In all cases when a commercial mortgage is applied for, a lending underwriter assesses the risk level of the proposed finance. Often you will find that each rate is tailored to match the strength of the deal and the property involved.
Some of the things that can influence the rates for commercial mortgages are:
- Experience of the company or individual
- The track record of the company or individual
- The commercial property
- The industry sectors
- The strength and performance of the current business or the business that is being considered.
High Street lenders tend to offer the best rates with investors looking for 70% loan to valuation (LTV) or less. Commercial mortgages from specialist lenders lean towards higher rates but they may be more flexible with their criteria and can lend up to 75% loan to value (LTV).
As a general rule rates on a commercial mortgage will vary from deal to deal and from lender to lender. Lenders will usually have a risk profile that they adhere to, so if a loan cascades outside the risk profile it will often be refused.
Commercial mortgage fees and charges
The fees associated with commercial mortgages are quite straightforward. An example of some of the fees are:
Generally, arrangement fees are normally charged at 1% to 2% of the loan amount, but again this can differ from lender to lender. Arrangement fees are often added to the loan when it completes. Some commercial lenders may request fees to cover the work they undertake if you do not accept their offer or the loan fails to complete, this is often referred to as a commitment fee, which will make up part of the total arrangement fee. This is payable with your formal loan application and is non-refundable.
You will often find that commercial properties are far more diverse than residential, so a surveyor will always be required to carry out a valuation on the property and write a detailed report to the finance company. Because commercial property varies so much you will find that there are no set survey fees. Valuations may start at approximately £500 for a simple case, but often the fees will be decided on a case by case basis. The fee is payable to the company after an initial offer has been accepted.
With a commercial mortgage deal, you will have to pay your own legal fees and also those of the finance company involved. Again because of the diverse nature of commercial deals, each fee will be assessed on a case by case basis as they vary with complexity. If you shop around for a relatively simple transaction you may find solicitors who will act for £500 for each party, but this is by no means guaranteed. You may be able to make some savings where it is agreed that both parties to the loan will use different solicitors in the same company.
It is now commonplace for brokers to charge for arranging commercial mortgages. You can expect to pay a broker fee of up to 1% to 2% of the loan value, depending on the complexity of the case. It is advisable however not to agree to pay anything until your broker has formed a loan offer at terms that suit your needs and requirements.
How to choose the best mortgage
If you have a good idea of what you need and have a good relationship with your bank you can always approach them and see what they can offer you. If you need assistance, then commercial mortgage brokers are experts at guiding clients on the lenders that offer the best interest rates that are most suitable for the deal involved.