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Commercial Mortgages

If you’re a budding entrepreneur looking to build a successful business, sooner or later you may need to buy a property, in which to base your operations.

Business loans can offer a great start, but as the prices of properties are high, you may need to find another way to fund the purchase of a commercial premises.

Find out more about Commercial Mortgages and how they work.

What is a Commercial Property Mortgage?

A commercial mortgage is most often thought of as a loan to purchase commercial premises.  There are two main types of Commercial Mortgage;

• Own Use – This type of mortgage is taken out to purchase the property you intend to run your business from.
• Commercial Investment – This is a loan to buy a commercial property, which you can then rent out to business tenants.

It is also possible to take out a commercial mortgage to renovate existing business properties.  

How is a Commercial Mortgage Repaid?

As the mortgage is secured against the business premises, the lender has the legal right to repossess your commercial property, should you fail to pay back the loan.

The mortgage can be taken out on a repayment basis, meaning that you will pay both the capital and interest of the loan amount in monthly, quarterly, or yearly instalments.  This payment method is designed to aid with cashflow, helping your business stay afloat whilst the commercial mortgage is paid off.

You can also choose to pay a variable rate of interest, based on the Bank of England base rate or LIBOR rate. You can also choose to repay on an interest-only basis, using your business’ profits to repay the loan, in full, at the end of the mortgage term.

You may also be permitted to ‘roll-up’ the interest and add it to the capital amount borrowed, to lower your interest repayments in the short term.

Typically, a commercial mortgage can run from 5-30 years and lenders will permit you to borrow up to 80% of the property’s value.

Please note: If you are seeking out a commercial loan for a new business, you may only be permitted to borrow 50% of the property’s value.

In terms of the rate of interest you pay for this mortgage, the valuator and lender will give you a figure based on their own calculations. You may be put on a higher interest rate if your business is viewed as not being the most profitable.

Am I Eligible for a Commercial Mortgage?

• You must have a decent personal credit history, as well as a business that is creditworthy. Take a look at our Guide to Improving your Credit Rating for more information.
• The checks on a business’ creditworthiness are lengthy and extensive. They will need to know its history, current level of profitability and long-term plans.
• You will need some money to pay for the mortgage set-up and commercial valuation.
• You may need at least 20% of the property’s value put down as a deposit in order to secure the loan. This figure may be higher if you are a new business.

What are the Advantages of a Commercial Mortgage?

• Your Business Stays Yours – With other types of investment methods, you may have to sell a portion of your business to get funding. With commercial mortgages, you give nothing away, provided you make your repayments on time.
• Flexible – Commercial mortgages can be an affordable way for businesses to access capital.
• Adverse Credit Sometimes Accepted – This is not an advantageous position for a borrower to be in (Find out more about Adverse Credit Mortgages here). However, there are lenders who will consider applicants with adverse credit histories for commercial mortgages.
• Fixed Rate – You can choose to pay off your commercial mortgage at a fixed rate. This can be beneficial to businesses who need to adhere to a strict budget. However, be warned that fixed rate mortgages are often for a limited time only, after which you may be switched to a variable interest rate. This may result in a sudden spike in your interest payments.
• Interest Roll-Up – You can also opt to pay off your mortgage interest with smaller repayments and add the rest to the overall cost of the loan.  This may be beneficial to new businesses who need cashflow. 

What are the Pitfalls of Commercial Mortgages?

• Restrictions- In some cases, you may be rejected for a commercial mortgage, because your intended use for the building may not feature on the lender’s list of approved business activities. The amount you will be permitted to borrow can also depend on the business activity. For instance, if you were looking to open a shop, as an owner-occupied business, you may be able to borrow on a 75% Loan to Value ratio. However, of your looking to use the premises as an investment property, the approved loan to value ratio may be lower.
• Set-Up Costs – Commercial mortgages often come with set-up fees. You will likely also have to pay for the legal processing fees and survey. To find out more about the legal costs of setting up a mortgage, take a look at this guide.
• Early Redemption Fees – Many of these mortgages come with early repayment charges. These usually apply within the first three-five years of taking out the commercial mortgage.
• Commercial Mortgage Rates – Lenders may charge higher interest rates on commercial loans than other mortgage types. This is because they pose a significant risk to lenders, if your business does not turn a profit, you will not be able to repay the commercial loan in full.

Commercial Mortgages work very differently from residential mortgages, as the assessment criteria are highly individualised, affecting both the amount of money you can borrow as well as the interest rate you will subsequently pay. Enlisting the help of an independent financial advisor can help you find the best commercial mortgage for your needs. Speak to a mortgage broker now, they can offer you free, no-obligation advice and a quote.