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 purchases or refinancing. Commercial mortgages 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. This makes commercial property mortgages more flexible than residential mortgages, which tend to take a strict approach to underwriting.
Who can get a commercial mortgage?
Commercial mortgages can be taken out by almost anybody, and they’re commonly used by property investors and business owners. At ABC Finance, we’re able to offer finance to individuals, sole traders, partnerships, LLPs, Ltd companies and overseas applicants.
What are the benefits of commercial mortgages?
The benefits of commercial mortgages are:
- 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 disadvantages of commercial mortgages?
The disadvantages of commercial mortgages are:
- Commercial mortgage interest rates are higher than those charged on residential mortgages.
- Commercial mortgage lenders require a larger deposit than residential mortgage lenders, usually 25-30% of the property value.
- The commercial mortgage application process can take a while, meaning you may need to consider other options if you’re looking to raise funds quickly. A commercial bridging loan can be arranged far quicker than a commercial mortgage.
Key product features
|Max LTV||Up to 80%|
|Interest rate||From 2.25%|
|Repayment type||Capital repayment, interest only or part and part|
|Interest type||Fixed or variable available|
|Acceptable security||Any commercial or semi-commercial property considered. Land accepted on a case by case basis|
- Loans from £25,000 with no maximum loan size
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
- Products with no early repayment charges available
What are the types of commercial mortgages?
Mortgages for commercial property can be split into quite a few distinct types, which are explained below:
Owner-occupied commercial mortgages
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 mortgages
Commercial investment mortgage 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 commercial mortgages
Interest only commercial mortgages are a type of commercial mortgage that allows you to pay only the interest each month. This has the advantage of keeping your monthly repayments low, but does result in higher total interest charges over the term of the loan. At the end of the mortgage term, an interest only commercial mortgage must either be repaid in full, or refinanced using a commercial remortgage.
Capital repayment commercial mortgages
Capital repayment commercial mortgages involve paying both the capital balance and interest each month to gradually repay your commercial mortgage over the loan term. This means higher monthly repayments but gives you the certainty that your property will be mortgage free at the end of the loan term.
Fixed rate commercial mortgages
Fixed rate commercial 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. A fixed rate product will benefit you when interest rates rise, but means you won’t benefit from interest rate reductions.
Variable rate commercial mortgages
Variable rate commercial mortgages do not have a fixed rate, meaning 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. That said, your monthly costs can change regularly, making it more difficult to budget effectively.
How much can I borrow using a commercial property mortgage?
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.
The maximum loan to value for commercial mortgages is 80%. The maximum LTV varies depending on the sector of the business that is applying for the loan. A maximum LTV of 80% 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 and the lender’s criteria. Typically 70% – 75% LTV is realistic for most sectors.
Some lenders base their LTV calculations on a ‘going concern’ value – a combination of both the business and property value. This will lead to a higher loan being achievable than those who base the LTV calculation on bricks and mortar value alone.
The second factor that decides the maximum loan on a commercial mortgage or semi-commercial mortgage, is affordability, how much the applicant can afford to repay comfortably. 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.
What commercial mortgage rates will I pay?
Commercial mortgage rates are between 2.25-7.5% per annum. The rates charged depend on whether your loan is owner-occupied or a commercial investment mortgage. Owner occupied rates usually start at 2.25%, with rates of 2.5-7% common. Commercial investment mortgage 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 the interest rate on the applicant’s credit history, income, how reliable the income is in the longer term and the quality of the property.
What are the set-up fees for commercial mortgages?
The set-up fees on a commercial mortgage are broken down below:
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.
Acquisition costs – 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.
How to apply for a commercial mortgage
To apply for a commercial mortgage, you must take the following process:
- You must complete a commercial mortgage application and assets and liabilities summary. This will allow the lender to assess your application.
- The lender will request supporting documents, such as accounts, leases, proof of ID and any other documents required to underwrite your loan application.
- Once the underwriting process is completed, the lender will issue a mortgage offer.
- The offer document must be signed and a property valuation is undertaken.
- The legal due diligence process begins, with separate solicitors acting for the applicant and lender.
- Once the legal process is done, the application process is complete and your mortgage is issued.
What documents are needed to get a commercial mortgage?
The documents needed to get a commercial mortgage are the following:
- 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)
Should I work with a commercial mortgage broker or approach a lender directly?
A good commercial mortgage 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 commercial property mortgage broker will also cross-check your application before submission to the lender to ensure you have the best chance of approval.
How can I work out my commercial mortgage costs?
The simplest way to work out your commercial mortgage costs is by using a commercial mortgage calculator. They allow you to calculate your monthly repayments by inputting your desired loan amount, interest rate and term.
What are the alternatives to a commercial mortgage?
The alternatives to a commercial mortgage are:
- Bridging loans – Bridging loans can be used to purchase or refinance a property faster than would be possible using a commercial mortgage, albeit at a higher interest rate.
- Residential mortgages – When buying a new home that you will run a business from, a residential mortgage may allow you to raise the funds at a lower interest rate.
- Secured business loans – When looking to raise money for your business by securing a loan against your business premises, a secured business loan is a strong option. They can usually be arranged quicker than a commercial mortgage and could allow you to borrow up to 70% of your commercial property value.