Types of commercial mortgages
Commercial mortgages are a useful and practical way of extending financing to your business once your business loan is complete. The interest on your commercial mortgage is tax-deductible, and should the property increase in value, your capital will grow alongside it. Additionally, it is an effective way to generate additional income for your business by renting out the property to commercial tenants.
There are two types of commercial mortgage - an owner-occupier mortgage for trading premises and a commercial investment mortgage for those looking to invest in commercial property. Our team of specialist brokers can help you source both.
When taking out a commercial mortgage, it’s important to know that there are usually no fixed rates for this type of financing. Instead, rates for business mortgages are dependent on experience, track record, industry sector and the strength and performance of your business or the business you are considering. Each lender uses its own risk profile assessment process to determine how much you can borrow and the applicable rates.
On the positive side, commercial mortgage rates are usually more competitive and lower than typical business loans, because they require you to have property as collateral to secure the loan, and create security for the lender’s investment.
However, mortgages tend to carry a higher interest rate than standard residential mortgages because they are still considered to be a higher risk for lenders.
A good broker will work with you to help make your case as strong as possible, and source the most competitive and advantageous deals.
Overview of commercial mortgage rates
Most commercial mortgages have a variable interest rate, which means the lender will quote you a percentage over the base rate or LIBOR (London Interbank Offered Rate) – like a residential tracker mortgage. Some fixed-rate commercial mortgages are available, although this is generally for amounts under £500,000.
Commercial mortgages are generally available up to 75% loan to value for preferred sectors, and it's important to remember that the interest rates on your commercial loans are tax-deductible.
We have previously arranged up to 100% of a purchase price with the benefit of supporting security, so if you need to borrow the total cost, you can discuss with our brokers whether this would apply to your circumstances.
Competitive terms are available for business owners; however, be prepared to move your business banking to achieve the best terms available. If you don't want to move your business banking, specialist lenders tend to be priced higher but don't want your business banking. They will offer some interest-only terms, and they'll lend up to 75% LTV.
Commercial mortgage fees
Commercial mortgage transactions are subject to the following fees:
Lender arrangement fee
Payable to the commercial mortgage lender for arranging the finance. This will either be added to the overall loan or deducted from the loan at completion. Some lenders may take part of the arrangement fee as a commitment fee upon acceptance of the lender’s formal mortgage offer.
The lender will require the property to be valued by one of their panel valuers. The valuation fee is usually paid when the application is submitted or once the facility is agreed in principle. Please be aware that valuations on commercial properties are usually more expensive than for residential properties due to the complexity of their nature.
Many commercial lenders require separate legal representation that the borrower will pay for. In addition, The borrower will often have additional legal fees payable to their own solicitor.
Given the nature and complexity of titles and covenants on many commercial properties, a higher legal cost is usually incurred compared to legal fees for residential property.
These fees depend on the mortgage broker firm you are dealing with, and it’s a good idea to get a clear understanding of their fee structure before you start working together. We charge a success-only broker fee, usually 1% of the loan amount. This fee is due within 18 days of receiving a formal mortgage offer from the commercial mortgage lender. To discuss this broker fee in more detail, please get in touch with one of our brokers.
Depending on the case’s complexity, we may also charge an initial administration fee for the work involved in submitting the application to the lender for an initial decision.
How much can you borrow?
How much you can borrow will depend on each lender's risk profile assessment process and eligibility requirements. That makes it essential to get a clear idea of what multiple lenders can offer you before deciding.
Here’s an example of how to calculate how much you can borrow on a commercial mortgage.
If the purchase price of the property is £800,000 and you require a £600,000 commercial mortgage over 20 years that carries a 1% lender arrangement fee and a 2% interest rate, this will incur:
- Monthly repayment on a capital repayment mortgage: £3065.65
- Monthly repayment on an interest-only mortgage: £1010
- Arrangement fee: £6000
- Total mortgage amount: £606,000
- Total repayment amount: £735,757
- LTV: 75.8%
Keep in mind that monthly repayments will fluctuate in accordance with the base rate/LIBOR.
Commercial mortgages for new businesses and start-ups
If you want to develop a commercial property portfolio and generate additional income for your business through property rental, you can use a commercial mortgage to raise the necessary capital. In these cases, you can expect to supply a larger deposit – sometimes around 50% - because new businesses present a higher investment risk to lenders.
How can a commercial mortgage broker help?
An experienced and qualified broker is invaluable when it comes to financing commercial property investments. From building the most robust case for your mortgage to giving you access to a wider network of lenders and negotiating on your behalf, our brokers are here to help you build your business property portfolio. Ethical, straightforward and dedicated to our clients, our team is ready to help make your property investment a reality.
To talk through your borrowing requirements and find out what rate you can expect to pay, give us a call on 0345 345 6788.
Alternatively, you can speak to one of our brokers by completing our enquiry form.