Commercial Mortgages Explained

01 Jun 2019

There is a knowledge gap when it comes to commercial mortgages and many business owners do not know where to go to find advice. The commercial mortgage market can be complex to navigate we have put together some information here to help.

What is a commercial mortgage?

Commercial mortgages are loans taken by businesses or business owners and secured on a property. The property can be offices, shops, residential buildings, hotels and restaurants and industrial premises. The mortgage term can be 3 to 40 years.

Buy-to-let (BTL) residential mortgages, even though they are secured on residential properties, are still considered to be ‘commercial mortgages’.

There are generally two distinct types of commercial mortgages – one is an owner-occupier mortgage where you’re looking to buy a property for trading premises, and the other is a commercial investment mortgage. Both interest rates and deposit requirements are higher than those of residential mortgages.

At a glance, some key points about commercial mortgages:

  • Due to the administrative costs involved, many lenders have a minimum lending limit of £50,000 for commercial mortgages.
  • Rates and terms vary depending on factors such as if you are an owner-occupier or if the property will be tenanted, the amount of deposit available, your affordability and the term required.
  • Mortgages for business generally require a deposit of around 25% to 40%. It is possible to get a 100% LTV mortgage, however, another property will need to be offered as security.
  • Terms can range from three years to as many as 40, but 15 to 25-year terms are the most common and attract the most competitive rates.

How can I get a mortgage for commercial property?

Affordability rules apply to commercial mortgages in much the same way as residential mortgages. A lender will want to see a company’s financial statements to see if the business can afford the repayments not only now but in the future, when certain ‘stress test’ criteria are applied.

Lenders will want to evidence the income and review the level of debt that the company may already have. They will also want to independently confirm the property value and will instruct a professional to value the asset prior to making an offer for a commercial mortgage.

There are many lenders for commercial mortgages and while high street lenders are usually the cheapest their affordability criteria are the most stringent and in some cases they require the borrower to move their entire banking relationship to them. For the many companies that fail to meet the high street lenders criteria, there are many specialist lenders to turn to.

Specialist lenders tend to operate in various niches and will offer non-standard terms. However, this payoff for a bespoke product usually means interest rates and set-up costs are higher.

How much can I borrow?

The amount you can borrow depends on many factors including the type of property you are trying to finance, the amount of the deposit you have and your affordability level. Another major influencer on the lending decision is whether you are an owner-occupier of the property or if the property purchase is to be a commercial investment mortgage, in this scenario the amount of rental income earned can be used in the proposal assessment but the loan to value ratio might be lower.

What will it cost?

Commercial mortgage rates vary according to the lender and the borrowers circumstances. Interest rates can be fixed or variable and are often based on a % over the current LIBOR or The Bank of England base rate.

Most UK commercial lenders will determine their level of risk, and therefore the interest rate charged, by a thorough assessment of your business – lenders will analyse your past performance, the current position and long-term plans of the business before offering a quote. A borrower’s credit profile, both the company and its directors, will also be reviewed so the underwriter can fully assess the borrower’s net worth and their history of managing credit products.

In addition to the interest rate there are other fees and charges involved in a transaction. The transaction costs can be substantial and many borrowers fail to fully cost a property purchase from the outset. Fees and charges vary from lender to lender and you should always compare these when seeking quotes.

Typical fees include:

  • Valuation fees. The price can vary depending on the type of property.
  • Arrangement fees. These are typically 1-2% of the loan amount and are usually added on completion of the loan.
  • Commitment fees. Alongside the arrangement fee, some lenders will charge a ‘commitment fee’ in order to cover the work they undertake if you don’t accept the offer. This is non-refundable and will usually be payable upfront as part of your formal application.
  • Legal fees. Lenders require you to pay theirs as well as your own.
  • Broker fees. As mentioned, using a commercial mortgage broker can be a great way to access the best deals and navigate the market. Brokers often have access to exclusive deals not available on the open market. They can also help to reduce the time taken to complete the transaction but their services will be around 1% of the loan value.

Borrowers should also consider any stamp duty and whether VAT will be charged and recoverable on their commercial property purchase.

Other considerations

Other restrictions could arise in the form of leasehold property, with it generally only being possible to secure mortgages for business if the lease has more than 70 years remaining.

How to find the best deals

There are many online resources which can help you find a good deal, however you can save time and money (yes you can actually save money) by using an experienced commercial property broker. This is because they know the market and the difference between a good and bad deal and can negotiate for you. They will often have access to exclusive deals not available in the general market.

The commercial property sector is busy with hundreds of lenders and incredibly complex products. Many products (especially time sensitive deals) are only available through specialist brokers and so to ensure you can access the whole of the market it’s advisable to engage a broker.

Be sure to choose a broker with experience of the sector, word of mouth recommendations are always the best and any good broker will be happy to give you client references.

Commercial Mortgages  – FAQ

Can I mortgage a commercial property I already own?

Yes, in much the same way you can re-mortgage or re-finance a residential property you can do the same with commercial property. Re-financing will incur transactions costs so make sure the savings on the re-finance out way the costs of setting up a new product.

Can I redeem a commercial mortgage early?

You may also pay any borrowings off early, although many mortgages come with an early redemption penalty fee. Usually this is a % of the total borrowing reducing over three to five years.

Can I get a business mortgage with no deposit?

100% LTV (loan-to-value) commercial mortgages are rare, but not impossible. You will have to offer additional security such as other property or assets and those that are available will typically charge much higher fees and rates.

The more deposit you can put up the better interest rate you are going to get because the risk for the lender is reduced.

Is business mortgage interest tax deductible?

Yes. There are also tax advantages to putting a commercial property into a SIPP, but you would need to take specialist advice to set up this type of transaction.

Why are commercial mortgage rates higher than for residential mortgages?

Prices are determined by risk. With commercial mortgages, the ability to make repayments is dependent on the performance of the business, and if it doesn’t perform, the bank will have limited assets from which to make its money back. It is also more difficult to assess the creditworthiness of a business, particularly one with a short trading history.

How long are commercial mortgages?

Typically, commercial mortgage terms are around 15-20 years. But it is possible to get terms as little as three years and as long as 40 years. Some lenders have an Early Redemption Charge (ERC) it typically starts at 5% when you first lock into the mortgage and then reduces during the fixed loan period, but because commercial mortgages are bespoke products and not pre-packaged, this is often negotiable at the outset with most lenders.

Are commercial mortgages interest only?

Lenders prefer to see balances reducing, both capital and interest. However, with investment mortgages, lenders do understand the tax position of their customer, so in these cases they will help by not insisting on capital repayment so long as the LTV is below a certain amount (often 60%), allowing the borrower to pay interest only. In other cases, lenders will grant a short period of interest only for example the first year.

Can you get a commercial mortgage without any accounts?

A lender wants to evidence that a proposed loan would be affordable to the borrower to do this the lender will normally ask to see the last three years’ accounts to prove this. Exceptions can be made where a business plan can show that the loan repayments will be affordable.

100% LTV (loan-to-value) commercial mortgages are available but will typically charge much higher fees and rates. Having at least a 20% deposit will give you more choice and better terms.

For any further questions or for a no-obligation quote give us a call.

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