If you’re at the point where you’re ready to expand your business, then it could be time for a commercial mortgage. The commercial mortgage offers finance options that businesses aren’t always aware of, in addition to the opportunity to buy a commercial property.
We’ve put together this guide for you so that you can understand what’s involved with commercial mortgages and how they may help your business to grow.
What Is a Commercial Mortgage?
A commercial mortgage is a large-scale loan used to buy (or refinance) property or land that is to be used for business. It’s also known as a mortgage for business.
Just as with a traditional residential mortgage, money is loaned and secured against the property. Commercial mortgages can also be used to expand a business and for property development – both commercial and residential.
Designed for a smaller market than residential mortgages, the commercial mortgage can be used in these different ways to:
- buy business premises
- secure land development
- develop an owner-occupied business
- add to a buy to let portfolio
Surprisingly, a buy to let mortgage is a commercial mortgage, despite being packaged for a volume market.
If you’re looking around for any property that is not where you’ll live, and you need a loan to make your purchase, you’ll need a commercial mortgage.
In this situation, the premises vary greatly, so the commercial mortgage is assessed on an individual basis and priced accordingly.
Business loans are taken on an unsecured basis and will typically be for any amount up to £25,000. Commercial mortgages are offered on a secured basis and can be for any amount.
Commercial mortgages are usually for larger amounts
Due to there being more administration required on a commercial mortgage, lenders prefer to offer a minimum loan of £50,000 to £75,000.
Designed to offer benefits to both parties, the lender gains security and the borrower enjoys less cost compared to renting. The commercial mortgage is typically taken on a long term basis such as up to 25 years.
With regards to how the commercial property is approved, a lender will usually lend up to 70% of the value of the property. The business will need to pay mortgage payments and use their own working capital to fund the growth.
With most commercial mortgages offering up to just 70% of the value of a property, the business is required to source the rest for the purchase to complete. This is often a significant amount of money to find.
What are the business benefits of a commercial mortgage?
The business benefits of commercial property are many and can provide a way to source business funding. As time goes on, you’ll recognise that the commercial mortgage can also give some form of future proofing for your business as you will be in a position to access equity as the value of your property rises.
Here are some of the business benefits that you can enjoy from taking out a commercial mortgage:
- The opportunity to release capital for growth or investment
- Business debt consolidation
- Purchasing new equipment for expansion of your business
- The expansion of the business for increased trading
- Opportunity to save expenditure otherwise spent on renting
- The possibility of sub-letting a piece of your property for an extra income
Business owners can either purchase a business property, purchase a company or even unlock equity with a commercial mortgage. Just as long as you have the tangible assets to use as security on it, you’ll find it’s a very flexible way to finance your property.
What you need to know about applying for a commercial property
As most lenders will want to see a fair amount of business documentation and records, it’s a good idea to begin preparing early for a smooth application.
The focus for the lender will be on whether they find reassurance that you’ll be able to repay the loan. They also want to know that if for some reason you default on the payments, that the value of your property will cover the loan value.
You’ll be asked for information such as:
- The last two years of audited accounts
- A profit and loss forecast for the next five years or more
- What your business performance currently is
- Information about who the stakeholders in the business are so that they can be credit checked
- A statement of your assets and liabilities
- A plan on how you will repay the loan and how the property will contribute to your cash flow
- A statement of the business’s credit
Choosing the right commercial mortgage lender
It’s important that you choose the right commercial mortgage lender for you. There are many out there, and you need the best match.
Each commercial mortgage lender will have their criteria for approving applications, with some having a focus on certain types of business. Others will focus on approving mortgages that come with plenty of asset security, while others will focus on land developments.
Financial checks will vary, but may include:
- The last three years of your accounts (and/or tax returns)
- The projected and current performance figures
- Recent bank statements
- The names, addresses and bios of the partners and directors of your business
- Profit, loss, asset and liability statements.
Just as you would a residential mortgage, it’s important to look around for the best possible deal. You most likely won’t find the best deals on the high street. Contacting a specialist commercial mortgage broker is probably going to be more fruitful.
A broker will look across the entire commercial mortgage market for you to find the best possible deal for your specific situation. Check that your broker will then keep looking at the market to ensure that you benefit from the best possible rates. You’ll be making repayments for many years, so will not regret spending the time to get the best possible deal.
You may want to begin your search for a commercial mortgage broker at the National Association of Finance Brokers.
Your commercial mortgage in practice
Typically, commercial mortgages are taken out for 15 years or so. Just as with residential mortgages, it’s imperative that you keep up your repayments, or your premises could be at risk. Just as with residential mortgages on leasehold properties, lenders prefer buildings to have at least 70 years to run on the lease.
There may be some lenders who will take applications from those with a negative credit history. However, showing a clean credit record will help when it comes to choosing what you want and ensuring that you get the most competitive deal. The more money you opt to invest will give you a better deal and a greater chance of having your application accepted.
Again, the lender will want to have a look at your business information to understand how profitable it is, what your plans and accounts are.
You should check whether there will be any restrictions imposed on the property such as whether you can rent it out or not. The best person to ask about this is your solicitor or a chartered surveyor.
Mortgage terms for commercial mortgages
Commercial mortgage repayment terms can vary dramatically. They may be 5 years or 40 years. Of course, it’s a large commitment and for that reason, both the lender and borrower needs to understand everything that’s involved.
When it comes to interest rates, you’ll notice that they are usually a little higher than those found with residential mortgages. This is due to the lending in this field being of higher risk. This is partly why the bank will most likely want you to put 30% deposit down.
This is a field that will play a role in the success of your commercial mortgage application. Although it isn’t the main focus for consideration, you will need to supply a full picture of how your company is running, along with projections and business plan.
Commercial mortgages vary in purpose. How you plan to use your property will play a part in how much you can borrow and what the interest rate is for repayment.
For example, if you opt to purchase an office block for your business to operate from, but then decide that you want to redevelop it and sublet it, your commercial mortgage will change shape. It will transform from an owner-occupied business to that of investment business, and you’ll most likely enjoy a decrease in your LTV.
All properties incur a land tax, but the rate varies. For example, a £500K property, you’ll need to pay £20K.
The interest rate that you’ll be expected to pay will be connected to the Bank of England base rates. They may be fixed for a certain period (often up to 5 years), and these guaranteed repayments can then be calculated into the projections of your business.
As with any residential mortgage, there will be a legal conveyancing fee, in addition to fees for arrangement, valuation and administration.
Renting out your property
Some business owners find this to be a very profitable way to make more income and help with repayments.
Always take into consideration the cost of renovating, installing facilities, decorating and general refurbishment jobs your property may need.
Fortunately, the interest repayments on your commercial mortgage can be deducted from your tax.
Sourcing the best lender for you if you’re a startup or contractor
If you’re only just getting going as a business, then you will need to put more money up front. The commercial mortgage lender will tell you that they will offer you less and that you’ll need a greater deposit as you will be considered to be a higher risk.
If you’re finding it a struggle to raise cash, the lender may accept security from an existing property. Many opt to use an existing property, such as their home. If you have equity in your home, you may be able to use this as a way to gain better rates on a commercial mortgage.
Keep this in mind. If the value of the property increases, the capital of your business will too. So you’ll have more equity and therefore will be able to use it for more growth and business expansion.
It can be used as a very cost-effective funding option, especially at a time when property prices are set to increase. It can then reduce the costs of your borrowing or securing better rates on your borrowing.
Quite simply, refinancing a commercial mortgage means paying off one mortgage and replacing it with another. It is usually done to secure better interest rates, freeing up more cash for the business.
Challenges in refinancing your commercial mortgage
Just as with your first mortgage, there can be challenges in refinancing your commercial mortgage. Sometimes it can take just as long as it did with acquiring your first mortgage. You should also check whether any early repayment fees are being charged by your first lender.
To refinance, you may need to gather a lot of financial data, projections, forecasts and balance sheets. If you cannot show all these figures, then you could find it very difficult to refinance your commercial mortgage.
Seeing as refinancing could help you in many ways, it’s worth spending the time to collect the information. You could enjoy more cash being available, a reduction of payments and less outlay each month.
Commercial Mortgage Calculator
If you’re at the stage where you want to know what’s possible with regards to getting a commercial mortgage, we have a commercial mortgage calculator that you might want to use.
Using this calculator will give you clarity as to what your monthly payments will be and what you can invest in your business.
You can access our commercial mortgage calculator here.
If you want to know more about how to get a commercial mortgage you can contact us. We can provide you with guidance and can help with answering any questions that you might have. We also have access to a network of financial specialists.