Recently, we’ve received a number of enquiries from investors and business owners looking for larger loans to finance both commercial properties and mixed-use properties, particularly as some older landlords are exiting their positions from the commercial investment sector (understandable after a deluge of rent arrears picked up during the Covid epidemic). Therefore, I thought I’d give you a flavour of what rates and terms you can expect to be offered in the current market.
As you might imagine, lenders price commercial mortgages based on risk (credit history, financials etc.), sector appetite and the cost of funds, and I’m happy to say, that currently, a number of lenders have come back to the table – post-Covid, albeit the interest rates are a little higher!
What’s a larger Commercial loan?
Anything from £500,000 up but we regularly help clients looking for loans well above £1m.
Why are commercial mortgage rates higher than for residential mortgages?
The risk for lenders is generally higher with business mortgages. A business owner’s ability to make monthly repayments will depend on how the business performs. Lenders will likely calculate debt serviceability for businesses impacted by Covid on post-Covid numbers (i.e. year’s ending from March 2018 to March 2020).
Commercial mortgage loan terms
Loan terms can vary wildly; expect to achieve anything from 10 to 25 years. That’s where using a commercial mortgages broker is useful: where there’s a will, there’s a way! Here at Mortgages for Business, we’ve got six commercial specialists across our two offices, and we all meet with lenders weekly (mostly Teams or Zoom nowadays!). We can even negotiate deals with your own bank if required, and because of the volume of business we introduce, we will get the very best terms for you.
Talking of terms, going back 10 years, many high street lenders stopped offering low-interest rates on mortgages (pre 2008 1-1.5% over BBR was the norm), and loan term trackers became very cheap. Nowadays, the costs of funds over longer terms are just too expensive, so the banks regularly quote on five-year facilities at lower rates with the repayment profiles over 15-20 years as a standard.
This means that lenders are less exposed, and it gave them the ability to exit facilities at term-end and have more control over their clients. After the fixed-rate had expired, lenders would often ask the borrower to find another lender or offer a new, higher rate on a take-it-or-leave-it basis. They’d charge new arrangement fees for the lending facility, often adding another 1.50% to the loan for the new facility.
Repaying the loan
Interest-only, capital repayment and part interest-and-part capital options for borrowers depend on the type of commercial property and whether the borrower is an investor or business owner-occupier.
Typically, on commercial investment mortgages of more than £1 million, the high street banks offer mortgages on a repayment basis only.
On mixed-use property – such as flats above shops or offices – some lenders now offer an element of interest-only and longer terms for the residential elements.
For business-owner occupiers, the ‘big four’ high street lenders (Natwest, Lloyds, Barclays and HSBC) will look for a repayment mortgage, although they can offer interest-only for a period of time; for example, say 12 months if refurbishments/upgrades to the property and business are required.
Children’s day nurseries are also en-vogue with loan terms available up to 25 years. If you’re already running a day nursery from a rented business premises, do bear in mind that some older freeholders may be looking to exit their investments, particularly in London. This could be an opportunity to purchase the freehold of your business, something we help clients do all the time!
It is worth noting that the banks have tightened up their loan to value criteria on single asset purchases in the care home and leisure sectors (e.g. hotels and public houses). Unfortunately, the pandemic means that there are very few options for investment mortgages in the leisure sector (e.g. a café or pub let to a third-party operator).
Commercial Mortgage Rates
For a semi-commercial mortgage including owner-occupier facilities at circa 70% loan to value, you can expect rates starting from 2.80% over the Bank of England Base Rate (BBR). Arrangement fees are typically between 0% to 2%, which can be added to the loan account.
If you are a doctor, dentist, accountant or solicitor borrowing £750,000 to £2,000,000, the mortgage interest rates are very low, and lending starts from around 2.40% over BBR. Obviously, the lower the loan to value, the better the interest rate you’ll be offered.
Of late, the banks have been very keen to support UK manufacturers with very low rates and higher loan to values available for the right business operator. Some commercial mortgage lenders will even consider unsecured borrowing if the cash flow of the business is good. You can visit our commercial rates page to learn more.
Higher LTV commercial mortgages
Higher loan to value commercial mortgages, typically 65% to 75% LTV, are in short supply, particularly across the leisure sectors. However, we find that the challenger banks can help, lending a percentage of the freehold value only, and offering interest-only to owner-occupiers or applicants purchasing commercial or semi-commercial investments.
The best pricing for commercial properties at 60% LTV ranges from 4.6% over BBR (variable) or five-year fixed from 4.80%. At 75% LTV, some lenders may require an element of capital repayment, but variable rates start from 5.05% over BBR, and five-year fixes from 5% over BBR. Pricing can be a little higher for commercial investment properties with no residential accommodation above the unit.
As some lenders are sector-specific, it’s best to speak to an experienced broker about the property or business sector so we can guide you to the right lender.
If you have any further questions please do get in touch with me directly on 01732 471 644 or call our mainline on 0345 345 6788
Take a look at how we've recently helped our commercial clients
Commercial case studies
Updated August 2021.
18th August 2021