Our simple to use commercial mortgage calculator can be used to work out your monthly payments on both capital a repayment and interest-only basis.
Interest Only Commercial Mortgages
Commercial mortgages are available on interest only, or full capital repayment. The number of lenders offering interest only mortgages is limited, however. This means that by excluding any repayment mortgages from consideration, you may have to pay a higher rate.
Interest only commercial mortgages tend to be restricted to a maximum of 75% loan to value (dependent on sector). Although you will pay a higher interest rate, the overall interest payments over the term of the loan tend to work out higher than on capital and interest.
When calculating your repayments, working from the capital repayment figure is usually advised. By contacting us, or heading to our commercial mortgage comparison page, we will be able to give you an idea of costs of current commercial mortgages.
Owner-Occupied Commercial Mortgages
An owner-occupied commercial mortgage is when the ultimate owner of the company and the owner of the property is the same person.
If a property is owned by an individual, who is also the shareholder of the business, the application would be considered owner-occupied. Although they are a different legal entity, the lender will take a common sense approach and treat the property and individual as the same entity.
This means that low business mortgage rates are available even when you rent the property to your own ltd company. This is also true when the property is owned by a different Ltd company, or a pension fund – as long as the ultimate owner of both is the same person.
The Factors That Affect Maximum Loan On An Owner Occupied Application
Firstly, the lender will look at your ability to maintain the monthly repayments. When assessing owner-occupied commercial property mortgages, your accounts will provide the answers they need to assess the maximum level of debt.
Different lenders have different calculations and as a result, what is considered affordable by one lender may not be by another. Lenders will usually work from the adjusted net profit, also known as the EBITDA. EBITDA is the Earnings before interest, tax, depreciation and amortisation
The EBITDA is calculated by simply adding the interest, tax, depreciation and amortisation back onto the net profit. Once this has been done, each lender will then expect this figure to be at least a certain percentage above your annual mortgage repayments at either the interest rate you will pay or a ‘stressed interest rate’. This percentage is usually between 125%-250% and the stressed interest rate (if used) is usually between 3%-6% more than you the rate charged.
Will Commercial Mortgage Lenders Accept Projections?
If your business is expecting growth in the next 12 months, projections will be accepted by some lenders. The key to using projected income is to ensure the figures are realistic and can be backed up by a logical case for their attainment.
If you’re expecting growth this year then it is important to be clear why that is and how it can be measured. For instance, if this year is already up on last year, that will help. If there has been an investment into the business with increased demand expected, that is also a positive.
Projections are difficult to predict and it’s important that the lender is given reasons to trust them. Where there are doubts about certain elements of the projected income, questions will often be raised over the validity of the whole set of projections.
Would I Be Able To Prove My Income With An Accountant’s Certificate?
Again, there are lenders that will accept this, however commercial mortgages raised purely against an accountants reference will tend to have a higher interest rate. The qualifications of the accountant behind the reference will also be crucial, with most lenders only working from the reference of a chartered or certified accountant.
As you can see, calculating affordability on commercial property mortgages can be complex and with lenders tending to have dramatically different calculations, it can be confusing and time-consuming.
The Factors That Affect Maximum Loan On A Commercial Investment Property
Commercial investment mortgages work to different criteria than those for owner-occupied properties. On top of the money coming in and the relative ability to pay the debt using this money, the lender will look at the quality of the lease.
Rental income is clearly very important and will play a big role in calculating how much money you’re able to borrow but it is only the first step. The lender will look at the amount of rent received in relation to the anticipated monthly repayment. Rent received will have to be a certain percentage of the monthly payment (usually between 125%-160% – but all lenders are different).
If the loan fits according to this, the lender will then look at the length of the lease. Some commercial mortgage lenders will accept short leases or even no lease.
Others will want to see the lease run for the entire length of the loan, restricting the mortgage length as a result. If the maximum term reduces, this will likely reduce the amount you are able to borrow.
Commercial leases will often have break clauses inserted into them. A break clause is a provision in a lease that allows the agreement to be ended early. It can be in favour of the tenant, the landlord, or even both.
Even a strong lease with a long-term left will be considered risky by a lender if the break clause is in favour of the tenant. This is because the tenant could end the lease at this point without recourse.
Where there is a break clause in favour (or partly in favour) of the tenant, the lender will generally treat the date of the break clause as the date the lease expires. This could reduce the maximum loan available and even increase the interest rate charged.
Not All Tenants Were Created Equal
The quality of the tenant is then considered, specifically their ability to pay the rent. If the tenant is seen by the lender as a risk, this could cause an issue. Depending on the perceived level of risk, the lender will take appropriate action when pricing.
If there is only one tenant and they are considered to be at a high risk of failure to pay the rent for the term of the lease, then this could restrict or even prevent lending. Generally speaking, this is fairly uncommon and there will usually be a redeeming feature, such as high demand for re-letting that could counterbalance the risk.
Where there are a number of tenants, the risk of total loss of rent is reduced. This means your loan application is less likely to run into issues as a result of tenant quality.
If you’re concerned this could apply to your application, discuss this point upfront with us and we’ll talk you through your options. We will generally be able to place your application with a suitable lender, who will accept the tenant profile of the property.
Buying A Property Under Value
Commercial mortgage lenders tend to work on the lower of the purchase price or open market value (OMV). If you’re buying for less than the OMV, you will generally have to put down a deposit based on the purchase price.
The exception to this rule is where you are an existing tenant. If you are an existing tenant and your landlord is willing to sell you the property under value, some lenders will class the discount as a deposit. This is rare and could result in slightly higher commercial mortgage rates, depending on circumstances.
What Are Regulated Commercial Mortgages?
Commercial mortgages become regulated if 40% or more of the property is to be used as or in connection with a dwelling. This occurs where a property is used to both live in and trade from. The property must be occupied residentially by the person taking out the mortgage and would still be classed as regulated even if the commercial part was let.