What fees will I have to pay?
Commercial mortgages are generally subject to the following fees:
Lender arrangement fee
The lender will charge this fee for arranging the loan. It is usually payable on completion and is often added to the loan, meaning you don’t have to make the payment out of your pocket upfront. Lender arrangement fees are usually between 0.75% – 2.5%
Some lenders will charge a commitment fee on acceptance of the formal mortgage offer. This is usually 0.25% and is deducted from the arrangement fee.
Commercial mortgage lenders insist that the property is valued by one of their panel valuers. Unlike a residential mortgage, the fee is not usually payable upfront. It is generally paid once an offer has been issued subject to valuation.
We always give our clients the option of paying the valuation fee as late in the process as possible. This ensures that everything else is agreed fully before you start paying out fees, minimising the risk of wasting money.
These valuations are more complex than their residential counterparts, meaning fees are usually higher.
Most brokers charge fees of 1% or more for arranging commercial mortgages. At ABC Finance Ltd, we don’t usually charge fees on applications above £100,000, if we are being paid by the lender.
These applications are more complex than residential mortgages and as such the legal fees tend to be higher. In addition to your own legal fees, lenders usually require separate legal representation, which is paid for by the borrower.
What loan to value will I be able to achieve?
Certain lenders will restrict the maximum loan to value (LTV) in certain sectors. For instance, a GP practice is allowed to borrow up to 100% LTV with certain lenders, whilst a pub is likely to be allowed a maximum of 70%.
When looking to take out an owner-occupied commercial mortgage, most industries are able to borrow up to a maximum of 80% LTV. Interest rates can still be very low up to this level, with 80% commercial mortgages at under 3.5% not uncommon.
For commercial investment properties, the absolute limit is likely to be 75%. It’s worth noting that interest rates will tend to increase the closer you get to this figure. The lowest tend to be available up to 65% LTV for commercial investment.
When working out the value, there is a distinction to be made, as different lenders work to different figures. Here are the main valuations that a lender can work to:
- Open market value (OMV) – The open market value is the price a property should sell for in the open market between a willing buyer and seller. This method calculates the figure on the assumption that there is no compulsion or desire to pay more or less than the true worth of the property when vacant.
- 90 day value (the 90-day forced sale value) – This is the value that the property would be expected to sell for in a forced sale situation. It allows for the discount applied for a quick sale and will come in lower than the above methods.
- Going concern value (for owner-occupied applications) – This method takes into account the value of the ongoing business in the property and assigns a value to it. For example, a public house with a good name locally and a regular stream of customers has more value to a potential buyer than a pub which has sat vacant for many years. This value is very real to a buyer, but a lender may not be willing to lend against it as it is intangible and could be eroded quickly if mismanaged.
- Investment value (for commercial investment applications) – This assigns a value to the strength of the lease and tenant in the property. It allows for the future income expected from the lease and generates a premium over the open market vacant possession value.
These methods of valuation can throw up significantly different figures, meaning the loan to value method generates different maximum loans. It is important to understand what method is used for the funding you are looking at before paying for the valuation.
A difference in valuation method could create a significant disparity in the amount of deposit needed to complete the transaction.
How long can I borrow the money over?
The maximum term offered varies between industries. In general, commercial mortgage lenders will accept a maximum term of 20 years, with some going as high as 25 years. This term is shorter than most residential. As a result, your monthly repayments are likely to be slightly higher than a residential mortgage of similar size.
With commercial investment property, some lenders match the lending term with time remaining on the lease. For example, if the tenant has 10 years left on the lease, a maximum of 10 years would be offered by some lenders.
For capital repayment mortgages, the shorter the term of borrowing, the less interest is paid per pound borrowed. The interest saved can be significant, so shorter loans can be beneficial, as long as the repayments are affordable.
Why are the rates charged higher than those on residential mortgages?
The difference in rate comes down to the increased risk of lending on commercial property rather than residential. In much the same way as a buy to let mortgage rate is higher than residential, there is a perception that your home is the last thing you would be willing to lose. As such, your residential mortgage is the last thing you would fail to pay. This keeps rates very low.
Commercial mortgages, whether owner-occupied or investment, tend to be seen as lower down on your list of priorities, and as such are a higher risk.
In addition to this, commercial property is also less liquid than residential property, so in the event of repossession, the lender may find it trickier to sell. Where a sale is made, the future value is also less predictable.
Can commercial mortgage interest be offset against tax?
Yes, the interest charged can be offset against tax, whether the property is used for the running of your business or let out as an investment property.
This is still the case even after the buy to let rule changes which saw residential landlords lose the ability to offset interest.
A broker has asked me to pay an upfront fee, should I do it?
This is a subject of much debate in the industry and something we come across often. Upfront fees are charged by some brokers, often described as a commitment fee.
Of course, the choice to pay a fee or not is up to you, but we generally advise against it. We never charge upfront fees, and like other brokers, we get paid a commission by the lender when your application completes.
Upfront fees are generally non-refundable and come with no guarantee of success, meaning you could well waste your money.
Paying an upfront fee will not make your application more likely to go through, although if you particularly want to work with a broker who insists, you may choose to pay regardless.