If you need to buy land or property for business purposes you’ll need a commercial mortgage. The business can be one you operate or a related party operates or is let out or rented to other businesses say you are the owner of a retail, battery park, investment Park or free trade zone. Contact us at Everest Financial Services for your Commercial mortgage requirements, click on the link
If interested to know more read further.
What is a commercial mortgage?
Commercial mortgages are a form of long-term finance that can be used to the purchase business premises, or to buy an existing business park, zone.
Uses of Commercial Mortgages
You may use a commercial mortgage to release funds stuck in an existing building which a business owns, which can be invested back into your business.
Commercial mortgages may be used to buy an investment property that can be rented or leased to other businesses.
Who is a commercial mortgage suitable for?
The reason why commercial mortgages are sometimes called business mortgages , is because they are often used by smaller companies to finance expansion plans or reduce costs; for example if they want to buy a business premises rather than rent one. Some are mixed use properties where the owner occupies the upper part as residential accommodation and the ground floor as retail unit.
Why should I need a commercial mortgage?
If your business has outgrown the space you are renting and the business is profitable with strong cash flows, or the landlord has proposed a painful hike in rent which can be used to repay the commercial mortgage, and the business has funds for the down-payment, you should consider buying your own, possibly larger premises.
By buying property or land for business use you will own the premises as an asset. Not only does this save you from having to pay rent to a landlord, but your mortgage payments could be significantly cheaper, too. And you would be accumulating equity in the property, while possibly benefiting from property price appreciation.
However, with this asset comes extra risks that you need to consider.
Which kind of properties can I buy with a commercial mortgage?
Any property that generates income can be bought using a commercial mortgage. The income will be used to repay the commercial mortgage.
These properties include shops, offices, retail outlets, warehouses, bazaar style units, restaurants, investment zones, free ports, yards with offices of courier and logistics companies.
What’s the difference between residential and commercial mortgages?
Commercial mortgages are similar to residential mortgages in that they are a loan taken out for the purpose of buying a property or land, there are some significant differences, the main one being use, residential mortgages are for accommodation as a residence and commercial mortgages for businesses accommodation.
Value
The value of the land or property for commercial mortgages tends to be larger than with residential mortgages.
Risk
With higher risks involved, lenders tend to require a larger deposit. Indeed, most lenders will require a commercial mortgage deposit of between 25% to 50%.
This results you in a maximum finance to property value (LTV) of 75% or lower.
Mortgage term
While residential mortgages tend to have a 25 to 30-year term as standard, a mortgage on a commercial property is typically much shorter. Indeed, they can be anything between 1 and 25 years, although many are capped at 15 years.
Residential mortgages have greater regulatory protection and there are government schemes to support first time home buyers and equity support schemes which enables LTV of 95%.
Semi-commercial mortgages
There are many types of mixed-use buildings required for businesses, such as a pub or shop with a flat above it. There are also homes with businesses attached, such as a B&B, hairdresser or cattery.
These types of properties, that have both a commercial and residential element will need to be financed using a semi-commercial mortgage.
Types of commercial mortgages
There are two main types of commercial mortgage:
Owner occupier mortgages
These types of commercial mortgages are when the business owner is looking to buy a property in which they can run their business.
Commercial investment mortgages
These can be used if you are buying property as an investment opportunity, for example to rent out the property. These are considered more riskier than owner occupier commercial mortgages. It is also possible to take out a commercial buy to let mortgage that allows you to purchase a property that is let to one or more businesses.
Drawbacks of taking out a commercial mortgage
Commercial mortgages can mean you end up paying less money longer term, especially if you are renting property in which you run your business.
If you’ve been renting for a while, you will suddenly be faced with being responsible for the maintenance and security of your business premises yourself, with all the costs that can entail.
You may also have to factor in having to buy equipment, furniture, setting up a phone and internet connection and having adequate insurance.
Renting is flexible. If your company should expand or contract you can move premises accordingly, which is trickier when you own the building.
Commercial mortgages are secured finance, which means the property is used as collateral by the lender against the loan. If you fall behind on your payments, you could lose the property, which is an unnerving thought.
Advantages of taking out a commercial mortgage
With a business mortgage you can choose to buy suitably sized premises in a convenient location for you and your staff to get to, close to railway stations, bus routes and other facilities and with as many parking spaces as you need.
You will have the freedom to adapt, modify and decorate it as you wish. And from a financial point of view, if property prices increase in the area, you will be the one getting the benefit from any gain in value.
If you should need to move to another location, you can choose to let your premises to another business and generate income this way.
You will no longer be paying rent to a landlord each month who not only holds a chunk of your money as a security deposit but can choose to raise the rent you’re charged.
How do commercial mortgage interest rates work
You need a bigger deposit
Getting a mortgage on commercial property is considered higher risk, which means the interest rates offered are significantly higher than those for residential mortgages.
For this reason, commercial mortgage lenders typically insist on higher deposits as a percentage of the property’s value and more detailed application processes.
You get a better choice of rates
With so many different types of businesses in the UK there is no blueprint to follow, so each application must be reviewed thoroughly by the lender on its own merits and the associated risks calculated.
What’s more, all industries are not equal. Businesses with lower risk will typically qualify for the best commercial mortgage rates, while higher risk firms may be offered higher interest rates.
Paying back your commercial mortgage
Commercial mortgages tend to be available as Fixed Rate and Variable Rate products.
If you choose a variable rate, it will usually be charged at a percentage above either the Bank of England base rate, the London InterBank Offer Rate (LIBOR) or Sterling Overnight (SONIA).
Should the tracked rate increase or fall, your mortgage payments will follow suit, so you would need to be confident you can still make your mortgage payments in this situation.
Commercial mortgage fees and charges
Of course, no mortgage application is free, so you’ll have to factor in some additional fees.
Arrangement fees
Arrangement fees are charged at 1 to 2% of the loan amount for loans under £1m, and are usually added to the loan, once it has been approved.
Valuation fees
Similar to residential mortgages, commercial mortgage applications will require the property to be surveyed before approval. Surveys can cost upwards of £500.
Legal fees
Solicitor fees are also £500+ and you will usually need to pay the lender’s legal fees, too.
credit report affects your commercial mortgage application.
Your business Credit score
A perfect credit score is not required, but your business credit record will be thoroughly scrutinised and the better your score, the more likely your chance of approval and interest rates available.
For this reason, it is advisable to check the information held on you by the three credit agencies in the UK: Experian, Equifax and TransUnion before applying to enable you to rectify any issues that could affect your application.
Fortunately, this doesn’t have to cost anything as it is possible to obtain reports from each of the agencies for free.
Requirements of a commercial mortgage
Different lenders specialise in lending to different business types so take some time to investigate which lender is most suitable for you.
You should ensure you have the necessary documentation, so that your commercial mortgage application can be processed efficiently:
- Proof of identity and address (passport or driving license)
- 3 to 6 months’ worth of personal bank statements
- 6 months’ worth of business bank statements
- Your current lease or tenancy agreement
- Business plan detailing how you will repay the loan
- 3 years’ of audited or certified financial accounts for your business
- Assets and liabilities statement
- Tenant and lease details (if applicable)
- Property details
- Details of any likely changes to your future turnover and profit
- Details of any other investment properties (if applicable)
While you may not need all of these documents, it can save you time if you do as well as demonstrate to the lender that you are a serious applicant.
Remember, lenders ultimately want evidence that indicates you have experience and know what you are doing. Submitting any proof that can support your case can help your application.
Using a mortgage broker to find a commercial mortgage
Commercial mortgages can be a bit of a minefield to navigate and off putting if you haven’t been trading for long. If it is a bit overwhelming, fortunately we at Everest Financial Services can assist.
By hiring a specialist commercial mortgage broker, you can benefit from their knowledge of the market and be paired with a lender best suited to your type of business.
A broker takes the stress out of the mortgage application because they can advise you on the supporting documentation required and help you submit the forms, as well as find the highest loan to value ratio (LTV).
All brokers charge slightly differently so ensure you understand their fee structure.
Once you’ve made your application and any extra documentation has been submitted, the lender’s solicitors will carry out the legal due diligence. If all is in order, contracts will be exchanged and funds released
Alternatives to commercial mortgages
You may find a commercial mortgage is not the best option for your business. Alternative ways companies can borrow money include:
Short term business loans: These loans, taken over a short period of time, can help you with your cash flow when you need them, without any long-term commitments.
Bridge Loans: These loans are short term, high-rate loans that are typically used by individuals that need to complete the purchase of one property, before buying another.
Development loan: These loans are usually taken out for 6 to 18 months for the purchase of land or development of buildings. The funds are issued in stages and must be authorised before the next stage can commence.
