What is a Commercial Mortgage?
A commercial mortgage is a loan granted to a business to purchase commercial property. There are several key differences between commercial and residential mortgages, with the most notable being:
The maximum loan to value may be lower than a residential mortgage
Variable mortgage interest rates are typically used for commercial mortgages. However, fixed-rate mortgages are available upon request
Commercial interest rates tend to be higher than residential rates but can be negotiated on an individual case basis
When considering a commercial mortgage, it’s essential to consider the following:
Your experience in the business sector (if an owner-occupier mortgage)
If letting to a third party, your landlord and/or property investment experience
Your available deposit
The costs of purchase
Lenders calculate debt serviceability on either the adjusted Net Profits of the target trading business or other businesses that you operate
If this is an investment purchase, the amount of rent received from the investment property to service the mortgage and the strength of the covenant and lease term remaining
Types of Commercial Mortgage
There are two main types of commercial mortgage, each suited to different investment goals and each impacting the kind of rates and finance that lenders will offer.
An owner-occupier mortgage: This model is for businesses seeking a property for their own trading purposes.
A commercial investment mortgage: This allows businesses to invest in commercial properties to let out to other businesses.
In both cases, it is important to remember that you are unlikely to receive a loan for 100% of the cost of the property. Typically, lenders require deposits of 25-40% for these mortgages. Having a reputable and experienced broker assist you will help you find a deal that works best for your business.
Commercial Mortgage Rates and Fees
This type of financing usually carries a variable interest rate. This means that you will receive a rate over the Bank of England base rate or the lender minimum base rate, similar to a residential tracker mortgage. Your investment risk profile will determine the amount over the base rate — for example, loan to value, debt service cover and experience in the sector.
In addition, you can expect your mortgage to include a range of fees, such as lender arrangement fees, valuation fees, legal fees, and broker fees. Learn more about commercial mortgage rates here.
Eligibility Requirements for Commercial Mortgages
Commercial mortgage eligibility is based on your background and experience and assessing your ability to meet the monthly repayments for the loan. Potential lenders will want to see solid assurance that you can repay their lending. This can mean providing a detailed business plan that addresses how the business will afford the repayments. Lenders will conduct background checks whilst underwriting the application. This includes assessing net worth, reviewing the source of the deposit, an overview of your personal and/or business bank statements for proof of good account conduct, and assess two to three years’ historical financial accounts for either the existing or target business purchase.
The lender will instruct an independent valuation of the freehold and/or a business appraisal. The valuers will comment on the value of the trading business, splitting out the business (goodwill) and freehold values. Alternatively, if you are letting the investment out to a third party, the market rent, quality of the tenant/lease term remaining and price per square foot with comparable evidence of previous sales included.
Remember, a bad credit rating does not mean you cannot get a commercial mortgage, but it may be more challenging as a result. Similarly, if the business has not been trading for long (under three years), lenders will be cautious about investing, and this can affect the amount you can borrow or the terms of the loan. You can work out your mortgage repayments with our calculator here.
How Do Commercial Mortgages Work?
Commercial mortgages for owner-occupiers offer better interest rates than unsecured commercial loans. Often, the repayments for a commercial loan are cheaper than rent payments, allowing businesses to plan and have tenure security. Traditionally, these loans last from 10 to 25 years, usually repayment mortgage, with variable interest rates linked to Bank of England Base rate and cover around 60% to 75% of the freehold property value. Some lenders can lend against a percentage of the ‘going concern value’, but please be aware additional security may be required by the lenders.
If you invest in commercial property to rent out, the interest rates may be higher, but some are available on an interest-only basis (making repayments lower). The property’s actual rental income or potential rental income will need to service the mortgage, but the lending will be no higher than 65 to 75% of the investment value.
Benefits of Commercial Mortgages
Taking out a commercial mortgage offers some key advantages for growing businesses, including:
Capital growth as property value increases and often cheaper monthly payments over rented stock
The location of the business is secure if you own the freehold of the property.
Rent rises will not be applicable
Tax-deductible commercial mortgage interest
Additional revenue if you rent out the property
Finding Competitive Commercial Mortgage Rates
With such a significant investment and capital outlay, it’s worthwhile considering using a commercial mortgage broker. With expertise in the sector, a valuable network of lenders for your business to leverage, and the ability to professionally present your case to lenders, brokers offer one of the surest paths to getting the best mortgage for your business.