What are the key benefits of commercial mortgages?
What is a commercial mortgage?
A commercial mortgage is a loan secured against a property that is deemed to be commercial, or non-residential, and can be used for either purchase or refinance. They can be used to fund a wide variety of property types including full commercial, mixed-use properties and even land.
Commercial mortgage lenders tend to take an individual view to assessing applications, meaning criteria is often more flexible. This allows lenders to consider a wide variety of ‘out of the ordinary’ scenarios without issue, such as minor issues with an applicant’s credit history.
Who can get a commercial mortgage?
Whether you’re a property investor or business owner, funding can be offered to most people.
We’re able to offer finance to individuals, sole traders, partnerships, LLPs, Ltd companies and overseas applicants.
What are the key benefits of commercial mortgages?
There are several key benefits to taking out a commercial property mortgage, including:
- The interest paid is tax-deductible.
- This type of lending is much more flexible than it was a few years ago due to the rise of challenger banks.
- Using this type of mortgage to purchase commercial property could see you benefit from increases in the property value.
- Investing in commercial property could produce higher yields than investing in residential property.
- Borrow over a long term, making savings compared to short-term finance, such as bridging loans.
What are the key features of a commercial property mortgage?
We work with lenders across the entire market to provide cost savings throughout the process. As a result, we can offer you the following:
- A choice between fixed or variable rates
- We can arrange borrowing for almost any property
- Choose any term from 1-30 years
- A choice of Interest-only, capital repayment or part and part available
- We can access the best rates, with no broker fees for loans over £100,000
Types of commercial mortgages
Mortgages for commercial property can be split into quite a few distinct types. Here we will break down the main ones.
Owner occupied or commercial investment
Owner-occupied commercial mortgages also known as business mortgages are used when a property is being purchased for the buyers own business to trade from. This includes transactions where a company lets to another company with the same or some shared shareholders or directors.
Commercial investment applications also known as a commercial buy to let mortgage, are used when a commercial property is being let to another business to trade from. Think of this as a buy to let mortgage for non-residential property.
Interest only or capital repayments
In most instances, lending is offered on a capital repayment basis, so you gradually repay the mortgage over the term.
Some lenders will offer interest only, although as this tends to be through challenger banks, this often comes at a slightly higher interest rate.
Where you’re looking to borrow on an interest only basis, you’ll need to consider how you’ll repay the balance at the end of the term. The most common methods are selling the property, repaying through other investments or taking out a new mortgage.
Fixed or variable rate
Fixed rate mortgages have an interest rate that stays the same for a set period, usually between 2-5 years. During a fixed rate period, your monthly repayments remain the same each month, regardless of changes in the Bank of England Base Rate.
Most commercial mortgages are a variable rate, which means that your interest rate, and therefore your monthly repayments can change as interest rates change. Variable rates tend to vary gradually meaning it’s unlikely you’ll see a huge jump in the rate within a short term.
How much can I borrow?
Your maximum loan is governed by two distinct lender criteria points – the loan to value (LTV) of your application, and where you sit in the lender’s affordability rules.
Loan to value
The maximum loan to value is 80% for certain sectors, usually healthcare or manufacturing. This means that your loan can not exceed 80% of the value of the property. For certain industries, this may be increased or decreased slightly, depending on the health of the sector.
Typically 65% – 70% LTV is realistic for most application types.
Some lenders base their LTV calculations on a ‘going concern’ value – a combination of both the business and property value.
For owner-occupied applications, lenders will look at the trading history of your business. Although all lenders use different calculations, they usually lend based on the EBITDA of the borrower. This is the companies earnings before interest, tax, depreciation and amortisation.
Once this figure has been established, lenders either insist that the EBITDA is a certain percentage over the annual mortgage payments, or lend a maximum loan at a set multiple of EBITDA.
Commercial investment mortgage affordability is usually calculated by setting a percentage over the mortgage payments, much like buy to let mortgages. For example, 145% rental cover, would mean that the rental income must be greater than 1.45 times the proposed mortgage payment.
Costs of a commercial mortgage
The main costs associated with these products are the interest charged, set up costs for the mortgage and any acquisition costs (for property purchases).
Owner occupied rates usually start at 2.25%, with rates of 2.5-7% common.
Commercial investment rates are generally slightly higher, with rates usually sitting between 2.8-7.5%.
In both cases, lower rates are reserved for the lowest risk applications. Lenders usually base this on credit history, income, how reliable the income is in the longer term and the quality of the property.
Set up fees
We work hard to save you money on your commercial property mortgage application. It’s not usually possible to avoid all fees, below are some of the common fees you can expect to pay:
Lender arrangement fee – arrangement fees are often charged as a percentage of the loan. Lender arrangement fees range from 1-2% but are usually between 1.5-2%. Although some lenders will expect some of the fee to be paid on offer, it is usually possible to add the fee to the loan.
Broker fees – most brokers will charge broker fees for arranging. This is often upwards of 1% of the loan amount. We don’t usually charge a broker fee for loans over £100,000, as we’re committed to saving you money throughout the process.
Some brokers will also charge an upfront administration fee before working on your application. We never charge upfront fees to work with you on your application.
Valuation fees – as with a residential mortgage, a valuer will inspect the property and produce a report for the lender. The fee is usually paid part way through the process. This is before the offer and the cost will vary based on the type, value and location of the property.
Legal fees – most lenders will expect you to cover both your own and their legal fees concerning the loan. The cost of legal work is higher than those associated with residential mortgages. The fees charged will vary depending on the loan size, property value and complexity of the transaction. Legal fees are usually quoted on a case-by-case basis.
The main acquisition costs are Stamp Duty and VAT. Stamp Duty rates for commercial property are the following:
- 0% on anything up to £150,000
- 2% on the next £100,000 (the part from £150,001 to £250,000)
- 5% on the part over £250,000
VAT is also due on some commercial property purchases. The estate agent will usually make you aware of this upfront. Where VAT is due, it can often be reclaimed following the purchase and where this is the case, we’re usually able to lend 100% of the VAT due in addition to your commercial mortgage.
Where to get a commercial mortgage
Working with a broker or approaching lenders directly
A good broker will manage your application fully, taking the pressure of you. They will compare options from across the market and will be aware of intangible factors, such as current service levels, or appetite for your sector, which is hard to find without their help.
That said, some brokers charge high fees for their service, including, in some cases upfront fees, which can significantly add to your costs. We don’t charge broker fees for mortgages over £100,000.
A good broker will also cross-check your application before submission to the lender to ensure you have the best chance of approval.
Choosing the type of lender to approach
Lending on commercial mortgages is offered through three different types of lenders – high street banks, challenger banks and specialist commercial mortgage lenders. High street banks tend to offer the lowest rates, but have strict criteria and often lack flexibility.
Challenger banks charge slightly higher rates, but offer a more flexible approach to lending, often with higher loan to values and more relaxed criteria.
Specialist commercial lenders tend to offer the most relaxed lending criteria and often accept adverse credit and projection led applications. This comes at a cost of higher interest rates.
How to get your application approved
Prepare your documents upfront
When looking to apply, it’s best to collect the required information upfront. For most applications, the following documents will be required:
- A fully completed application form
- A detailed assets and liability summary
- 3-6 months statements for your business bank accounts (for owner-occupied applications)
- 2 years trading accounts (for owner-occupied applications)
- A copy of leases and tenancy agreements (for commercial buy to let applications)
Be as responsive to requests as possible
Staying at the front of the lenders mind is paramount to keeping your application moving forward in a positive way.
Ensuring that requests are complied with quickly can be a major advantage and give the lender a better impression of you as a borrower. This can prove to be key should your application run into trouble later down the line.
How can I make savings on my monthly finance costs?
Some lenders will allow you to take out your loan on an interest-only basis. It is recommended that you consider this carefully or enquire above to speak about this with an expert.
Can I remortgage to repay loans and other unsecured finance?
Where appropriate, most lenders will allow you to repay unsecured debts when remortgaging your property. When repaying short-term finance using a mortgage, it is recommended that you consider the situation carefully as it may save you money on a monthly basis, but could end up costing more in the long run.
How do they compare to bridging loans?
Bridging loans are a form of short-term finance, whereas mortgages are long term. Although they may take a little longer to complete, you will experience big cost savings by taking out a commercial property mortgage rather than short-term finance.
For more information, try out our mortgage repayment calculator or read our guides.