A guide to commercial mortgages

By Joe Francis Updated 28th Oct 2019

If you own a business of any kind, it’s likely that the concept of a commercial mortgage will crop up as you consider different premises. Before jumping straight in at the deep end, though, it’s imperative that you conduct the necessary research so that you can make a calculated decision with the best interests of the organisation in mind. Here’s all you need to know.

What is a commercial mortgage?

The definition of a commercial mortgage is quite simple to understand. It simply means a mortgage that is taken out on a property that is not your home. In addition to standard mortgages for commercial properties, it is a term that also incorporates buy-to-let mortgages in spite of the fact that they are an almost separate entity that are packaged for the high volume market.

A commercial mortgage may be taken out on any type of commercial property including but not limited to offices, shops, warehouses, and multi-property developments. As highlighted by the buy-to-let element, it can be used on residential properties too – as long as they aren’t used as your home.

When are commercial mortgages needed?

Commercial mortgages naturally account for a far larger percentage of the overall gross mortgage value than the overall gross volume of mortgages, which is because the average commercial mortgage is around 600% more costly. The commercial mortgage is most commonly used when a traditional unsecured business loan ends.

Business loans usually suffice for up to £25,000, but lenders need security for the larger amounts, especially as commercial clients can be seen as a bigger risk. Business mortgages can cover up to 75% of the property value on a loan-to-value model and can last for between 36 months and 25 years. However, it should be noted that commercial mortgages for investment properties are capped at 65% of the property value.

The key features of a commercial mortgage

There are several key features to understand when taking on a commercial mortgage, which is why you must familiarise with the most significant terminology. They are;

  • Loan amount – how much will be borrowed in relation tot he loan-to-value ratio and any appropriate debt service coverage.
  • Term – the duration of the loan, again it is likely to be set somewhere between three years and 25 years depending on the circumstances.
  • Interest rates – these may be set as fixed-rate or floating rate payments. As with residential mortgages, this is the money paid on top of property value.

While the fundamentals of using a mortgage to buy a property via a loan are very similar to those of residential transactions, there are several noticeable differences to consider. Firstly, commercial mortgages usually encounter higher interest rates to reflect the perceived increase in risk compared to home mortgages.

However, the rates are often lower than those offered by business loans due the fact that the commercial property will be used as collateral. Finally, it should be known that fixed-rate mortgages are almost never available for commercial mortgages, meaning variable-rate agreements are necessary.

The benefits to a business of taking out a commercial mortgage

Before even thinking about the prospect of taking out a commercial mortgage, you’ll need to confirm that this is the most suitable solution for the future of your business. The biggest incentives for taking out a commercial mortgage on the chosen business premise(s) are;

  • You gain an extra asset for the company.
  • Ownership removes any concerns about being forced to move on.
  • The commercial mortgage interest rates are tax-deductible.
  • Property value appreciation will also boost your capital.
  • Rentals (either the whole property or part of it) can create a source of income.

This is often the best solution for the sake of your finances, long-term stability, and peace of mind. Moreover, having the purchase of the commercial real estate under control allows you to spend more time actually focusing on the business.

What to consider when seeking a commercial mortgage

Commercial mortgages are usually worth a substantial amount of money, especially when you factor in the interest rates and other costs. Due to their complexities, it’s essential that you conduct the necessary research to reach the most logical result. The key points you need to consider include;

  • Are you an eligible candidate? The lenders will judge you on a various criteria including cash flow, debts, projected revenue, general income, assets, and more. Any subsequent actions are futile if you aren’t a suitable candiate.
  • How much will the monthly repayments be? You must also calculate whether you have the funds to satisfy those requirements each month.
  • Will your credit history bump up the interest rates? It’s still possible to get a commercial mortgage with poor credit scores, but the negativity of higher interest rates will continue to take their toll for the duration of the mortgage.
  • How long has the business operated for? A company with a track record of success may be seen as a lower risk, which can unlock more agreeable terms. Conversely, a brand new business taking on a new mortgage may be deemed high risk.
  • Do you have funds for the deposit? Even at a 75% loan-to-value mortgage, you’ll need to find a deposit that’s far greater than the deposit used on a home. Boasting those funds is key.
  • Can you afford to lose the property? This is what will happen if you default on repayments as the property is used as collateral. The fallout has the potential to decimate the company, which is another reason to calculate the sums.
  • Do you need help? The DIY approach to a personal mortgage may seem easy, but using a commercial mortgage broker may be necessary. Aide from understanding the complexities, they can help achieve the best loan-to-value and interest rates.

There are a variety of additional practicalities to consider. There’s little point in committing to a long-term agreement on a property when your company may outgrow the building within a year or two. Issues like this are crucial additions to the pre-application process.

What types of commercial mortgage are available?

While there are many aspects to mortgage agreements, meaning there are hundreds of varying offers and potential outcomes to consider, all commercial mortgages will ultimately fall into one of two categories;

  • Owner-occupied mortgages – when you are using the commercial property as the place that you will trade from.
  • Commercial investment mortgages – for properties that you intend to rent out or generate money from in a direct manner.

What fees are there for a commercial mortgage?

As with residential mortgages, the total repayment isn’t defined by the loan value plus the interest rates. There are several smaller (and often one-off) expenses to consider. The most obvious ones are;

  • Arrangement fees – usually amounting to between 1% and 2% of the mortgage amount, this is a fee charged by the lender for preparing the offer. This is usually added once the mortgage has been finalised, although some lenders will want it beforehand as to cover the costs of their work should you decide to reject the mortgage offer.
  • Legal fees – the legal fees need to cover the costs related to attorneys drawing up a contract. You will be responsible for paying your own legal professional as well as the lender’s. However, the cost of each party can start at as little as £500, making it a relatively small cost for businesses. It is an immediate cost, though, so consider your cash flow.
  • Valuation fees – as with residential properties, a property valuer will visit and inspect the commercial premise to ensure that the agreed mortgage price is fair for the buyer and seller. In simple cases, such as valuing a rental property, this can cost a few hundred pounds. Bigger, complex settings maybe a few thousands.

Finally, you may need to consider the cost of a mortgage broker. While this is an additional overhead on the face of things, the direct financial savings (as well as the indirect savings due to time saved) will make it a great investment, not least because it will also unlock the very best results for your business. Even if they charge 1% of the loan value, the benefits easily outweigh the negatives, particularly if this is your first commercial mortgage.

What are the alternatives to commercial mortgages?

Commercial mortgages aren’t the only suitable solution for buying a commercial property, and some business owners may benefit from choosing one of the following;

  • Bridging loans – loans that are used to buy properties before the existing property has sold. They are a short-term agreement that are settled upon the sale of the current property.
  • Personal loans – ranging from £1,000 to £25,000, personal loans may be used to support your business in many different ways. Extra relief for buying the property is only one example.
  • Short-term loans – used to access additional funding without long-term commitments. This can be an ideal solution when you have the revenue but not the cash flow to buy the property in a short time.

While buying a commercial property is naturally a hugely beneficial solution in many different situations, it’s not a necessity. Working from a rented working environment can be a good option too, especially if you plan to expand the company in the short-to-mid term future or have concerns about the sustainability of the company.

Who are the best UK commercial mortgage lenders?

Commercial mortgages are offered by a host of lenders and banks within the UK. Before making a decision, you should know that the property type can impact the different terms of the agreement too. So, it’s imperative that you take this into account as the best option for an office may not be the same as a retail one.

Generally speaking, there is no 'best' lender that fits all. The 10 lenders below all offer commercial mortgages at the time of writing.

  • Barclays
  • Natwest
  • RBS
  • HSBC
  • Lloyds
  • Together
  • Assetz Capital
  • Bank of Scotland
  • Eastern Credit
  • W M Mann & Co.

How can you get a commercial mortgage?

Once you’ve found the right commercial property and have confirmed the type of commercial mortgage that is required, you need to get the application completed and accepted before getting to work in your new premise. The process begins with analysing the offers from the lenders above – whether through the DIY approach or via a broker – and is followed by a fairly similar process to applying or a home mortgage.

To do this correctly, you will require three months of bank statements, proof of identity, proof of address, three years of trading figure, lease/tenancy agreements, and a business plan that includes the financial projections. Once completed, the following steps will lead you to success;

  • Complete the submission of the online Asset and Liability form,
  • Complete the submissions of the commercial mortgage application form.
  • Submit the relevant information regarding your business.
  • Pay for a valuer to visit and value the property.
  • Allow the lender’s solicitors to conduct their assignments.
  • Receive, and accept, the mortgage.

The process can take several weeks, but should be relatively straightforward as long as you have the right mortgage lender and legal experts on the case. Whether using the property as a workspace or an investment, the door to new opportunities will swing open.


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