What is a Commercial Property Mortgage?

A commercial mortgage is a loan that is secured on a property that you don’t live in. A buy-to-let mortgage is a particular type of high volume commercial mortgage that fits a volume market. 

When are commercial mortgages used?

Commercial loans typically come into place where a business loan ends. Business loans tend to cover values of up to £25,000 and are unsecured. For more significant amounts, lenders will look for more security in order to reduce the risk to themselves. 

A business mortgage will usually last from three to 25 years, and you’ll typically manage to secure a 70 - 75% mortgage. This is just a measure of the loan-to-value ratio to see how much you can borrow in relation to how much the property is worth. If it’s an investment, the amount you can borrow will be determined against the rental income you generate, but this will likely not exceed 65% of the overall purchase price. 

If you’re buying a business that already includes goodwill and existing stock, then the amount available could be reduced further. 

Key features

It’s essential to be aware that a business mortgage plan will differ from regular mortgages in a few ways:

• There are typically no fixed rates for commercial mortgages. 
• You’ll usually pay a higher interest rate in comparison to regular home mortgages as these are a higher risk to lenders.
• Commercial mortgages will have better interest rates than standard business loans as these will require property as collateral.

What size businesses are the most common across the UK

Here is a breakdown of the size of UK business owners. The following data sourced from Mintel and is accurate as of April 2019:

• 76% are sole traders
• 20% are micro-businesses
• 4% are small businesses 
• 0.6% are medium businesses 
• 0.1% are large businesses 

The benefits of taking out a commercial mortgage

Here are just a few benefits of taking out a commercial mortgage: 

• The interest on a commercial mortgage is tax-deductible.
• If your property increases in value, then your capital should also see an increase.
• You’ll have the ability to rent out a property to generate extra income. 

How to apply for a commercial mortgage 

Hiring a specialist broker sourced through Rangewell will help ensure that you’re paired with the most suitable lender. It will also make your application process stress free and manageable. The process of the mortgage application will work in a similar way to taking out residential mortgages on your home:

1. You’ll carry out an Asset and Liability form (you’ll usually be able to do this online).
2. You’ll then complete your official mortgage application. 
3. You’ll then be asked to provide information about your business (you can see these details below).
4. Then, the property is valued.
5. The lender’s solicitor will then carry out all the due diligence.
6. If you’re approved, you’ll then receive an official mortgage offer from the bank.

It will be worth collating all of the documents below, so your application process is as straightforward as possible.

• Bank statements from the previous 3 months. 
• Your trading figures from the past 3 years.
• Proof of ID and address.
• Any lease or tenancy ingredients. 
• You may be asked to provide a business plan covering financial projections - this will help the lenders determine how likely you can pay off the loan.

To find out more about commercial mortgage rates, speak to Rangewell today, we can help pair you with a specialist lender who'll provide the best advice.

Things to consider 

Commercial mortgages can be pretty complex, so it’s a good idea to really consider which mortgage will be appropriate for the purchase of your business premises to ensure you can afford the monthly payments. Here are just a few things you may want to think about:

• You can still apply for a commercial mortgage with a bad credit rating and bad credit history, but you should expect to pay a higher interest rate as you’ll be classed as a higher risk.
• Mortgages are a type of secured loan, and your property will be used as collateral by your lender against the loan. This means that if you default, then you’ll more than likely lose ownership of your real estate. 
• Deposits for this type of loan can be considerable; you’ll need to ensure that you’ll pay back both the deposit and monthly payments.
• A commercial mortgage broker from Rangewell can help you find the best loan-to-value ratio (LTV)
• If you’ve not been trading for very long, lenders may see this as a sign of high risk and may request personal guarantees.

Are there different types of commercial mortgages?

Yes, mortgage loans can be divided into two categories:

• Owner-occupier mortgages - This is a type of lending used to buy a property that will be used for trading. 
• Commercial investment mortgages - This type of loan is used to buy a property you plan to let out. 

Interest rates on a commercial mortgage 

Generally, most commercial mortgages will be paid at a variable rate. A rate will be quoted as X% over base or LIBOR. In residential terms, this is what we would refer to as a tracker mortgage. Fixed-rate mortgages only tend to be available for amounts under £500,00. This is because the lender will take on the rate risk themselves so that they may have the advantage.

The rates that are charged for commercial mortgages and business loans won’t be determined from the offset like personal loans are. Most lenders will usually have a risk profile that they work to, so if your loan application falls wide of their risk profile, it’s more than likely that it will be refused.

What are the fees involved with commercial mortgages?

Here is an overview of the costs that you should expect to pay during your commercial loan application.

Arrangement fees: These are usually added to the loan after approval, but some lenders may request the fees earlier. The standard arrangement fee is around 1%-2% of loan amounts up to £1million.

Valuation fees: The valuer will visit the property and write up a report to the lender. Commercial valuations can start from £500 for a straightforward case, but fees are based on individual quotations, which will be payable to the lender after an indicative offer has been accepted. 

Legal fees: You’ll need to cover the cost of your own legal fee as well as the lender’s fees. This can start at around £500 for each party. 

Broker fees: A broker can give you specific information and advice that is completely tailored to your situation. The service charge is usually around 1% of the loan value.

Speak to Rangwell today to find out more about your monthly payment schedule. 

Eligibility and criteria

To qualify for a commercial mortgage, you’ll need to pass the lender’s eligibility checks, and these can differ from each lender. They usually include:

• The cash flow and any debts that you may owe to assess the financial health of your company. 
• The projected income of your business to help determine if you can afford to pay back the loan. 
• Your ability to pay back the deposit amount, this will likely be 20% to 40% of the loan. 
• Your rental income may be taken into account as this will affect your business’s cash flow. 
• Your general income and any assets you have. 

Alternatives to business loans 

There are other options available if a business mortgage isn’t right for you; these are:

• Bridging loans - This will help you to complete the purchase of a property before you manage to sell your existing home.
• Short-term loans - These can help you access funds without the loan term commitments. This is usually used for financial relief to cover working capital and cash flow. 
• Personal loans - You can usually borrow anywhere from £1,000 to £25,000 - and you don’t need to be a homeowner to apply.

Compare commercial mortgages 

Rangewell can offer access to specialist brokers who can give you an idea of the deals available to help you find the best deals suitable for your needs.