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What is a Commercial Mortgage and how does it work?

Published on 25th June 2018 - Last update on 8th January 2019

Property is an invaluable resource for UK businesses, but overcoming the cost barrier can be intimidating and frustrating, at least at first. By exercising your determination, you’ll see that it is not the impossible and success is within your grasp. One way of achieving your property goals is by spreading out the costs that are involved through applying for a Commercial Mortgage. However, before placing an application, it always pays to make sure that you fully understand the product you're considering and whether it’s suitable for your business’ needs and financial situation. So what is a Commercial Mortgage and how does it work?

Why should I use a Commercial Mortgage?

Commercial Mortgages are a secured, long-term property finance solution that can be used to help support and spread out the cost of commercial and residential property or land. In addition, Commercial Mortgages can also be used to release equity tied up in any unencumbered property within your portfolio in order to fund renovations, refurbishments or any other property-specific goals you have in mind. However, being a secured finance solution, lenders will typically use the property you’re looking to purchase or refinance as collateral. As such, if you fall behind in the fixed monthly repayment scheme, lenders could repossess the property.

How much can I borrow with a Commercial Mortgage?

What makes Commercial Mortgages such a popular option is that funding can start from £50,000 with no maximum other than what the lender is willing, or able, to lend. Therefore, you can borrow an amount equal to the property’s asking price, or current worth (if refinancing), minus the amount of equity you need to put forward as part of the agreement.

Thinking about moving into your first permanent business premises? Or are you eager to expand your presence into new areas? Apply for a Commercial Mortgage or learn more about how your business could benefit.

How do Commercial Mortgages work?

Commercial Mortgages are long-term agreements that can last anywhere up to 20 years (or possibly more), helping to make your property purchases more affordable. However, you will need to contribute to the cost of the property in question. This means paying an upfront sum equal to an agreed percentage of the property involved. Subject to negotiation, this typically starts at 20% of the property’s total value. But in order to increase your chances of getting approved and reduce the amount of capital you need to borrow, you could offer anything up to 40% instead.

Should I use a Fixed or Variable Rate Mortgage

Commercial Mortgages are repaid using a Fixed Monthly Repayment scheme. However, you can repay the agreement early but will be charged a redemption penalty by the lender as a result. Although the principle of each repayment remains the same, the amount of interest that will be charged on top can vary depending on the type of agreement you choose. As such, you need to be aware that a Commercial Mortgage can be either Fixed Rate or Variable Rate, and how each may impact your business.

  • Fixed Rate Mortgages: can offer a sense of certainty because the interest rate you’ll be paying will remain constant, even if market interest rates rise. However, if market interest rates fall, you’ll be missing out the potential savings.
  • Variable Rate Mortgages: can have fluctuating interest rates which are determined by the going market rate, according to LIBOR. As such, if market rates were to decrease whilst you were locked in an agreement, the amount of interest you’ll need to pay for a certain period will be less. However, if they were to instead rise, you’ll need to pay more interest and ensure that your business can afford the additional expense.

Need help purchasing property for your business?

As well as bringing together a talented team and acquiring the latest equipment in your sector, purchasing your own premises could be the next step in your journey. However, property is often very expensive, leaving a demoralising impression at first glance. But don’t let your aspirations end here, especially when there are many finance solutions available to help you overcome this obstacle. Whether you’re looking to acquire your first permanent premises or expand the size of your portfolio, one way of driving your business forward is by applying for a Commercial Mortgage. But where do you begin to source a cost-effective solution from a lender you can trust? Simple.

At Rangewell, we’re an Access to Finance specialist working with over 300 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide through the application process. We’re with you every step of the way. So if you’re looking to purchase to property for your business, apply for a Commercial Mortgage today or find out more with Rangewell.


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David Harrison

David Harrison

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