Business mortgages explained
What are business mortgages?
A business mortgage is designed to allow you to fund the purchase or refinance a property for use as business premises. They are a form of commercial mortgage and are also known as owner-occupied commercial mortgages.
Applications are usually underwritten manually, rather than by computer. This means that it’s very important that your application is well presented if you want the best possible chance of success.
What is classed as an owner-occupied commercial mortgage?
An owner-occupied commercial mortgage is when the ultimate owner of the company and the owner of the property is the same person, or people.
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 company and individual as the same entity.
This means that low 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 – if the ultimate owner of both is the same person.
Owner-occupied commercial mortgage uses
These mortgages aren’t just used to purchase property, they can also be remortgaged just like a residential mortgage to secure you a better deal.
This is common where the business’ performance has improved over time and lenders now see you as a lower risk applicant.
Where other borrowing has built up in your business, refinancing the debt into your commercial mortgage could save your business significant amounts in monthly payments. The rate charged on a mortgage will also be lower than that offered on most business loans.
It’s important to remember that when you refinance short-term debt to a longer-term, although your monthly payments may be lower, the total charge may be higher.
If you’re not quite ready to talk to an adviser, compare your options now and try our commercial mortgage calculator.
How does this type of finance compare to a residential mortgage?
They actually work in very similar ways, although there are some differences. The main ones are the deposit required on a commercial mortgage tends to be higher than residential mortgages.
The fees also tend to be a little higher, as mentioned earlier on the page, often 1.5-2% of the loan amount. These higher fees continue as stamp duty also tends to be higher for commercial property.
Finally, although the process of applying for a mortgage for a business can be a little more involved, there tends to be more support available from your lender once the money has been lent.
Owner-occupied commercial mortgage criteria
Criteria at a glance
1 Borrow up to 80% Loan to Value (LTV).
2 Fixed and variable rates available.
3 Rates from 2.25%.
4 Borrow from £25,000 – no maximum loan size.
5 Terms from 5 years to 30 years.
6 Any security considered.
7 Loans for trading or start-up businesses only.
8 Previous adverse credit considered.
9 Repayment or interest only.
What is the maximum term for commercial mortgages?
Typically, terms are available up to a maximum of 25 years. Some lenders will accept terms as high as 30 years, although these are few and far between.
Can I let out part of the property?
Yes, if you plan to let out part of the property, you can still take out a business mortgage.
The lender will generally check the affordability based on both your financial performance, plus the proposed rent and lend on this basis.
Where your business performance is not able to support the loan and you’re relying solely on the rental income, issues may arise Lenders will usually expect to see financial strength in the business that they are lending to.
How much can I borrow?
Our minimum loan is £25,000 with no maximum loan size.
Loan to value
Business mortgages are available up to 80% of the property value. Certain industries will see this reduce, as will applicants with a history of adverse credit. Applications are available on interest-only or capital repayment. Interest-only applications are usually capped at 75% LTV.
Some industries, such as doctors and dentists can borrow more than 80% in certain circumstances.
What happens if the property is VAT registered?
Where you’re buying a VAT-registered property, we may be able to support funding for up to 100% of the money due. The funding is then repaid with any related fees and interest on successful reclaim of the VAT.
Business mortgage rates & costs
There are many different mortgage products available for business owners, with the best deals starting from 2.25%. In practice, mortgage rates tend to sit between 2.35-6%, with the best deals being reserved for the strongest applicants.
How is the rate that I pay decided?
Rates vary depending on the following-
- The financial strength of your business
- Loan amount
- Credit history
To compare the latest rates, head over to our commercial mortgage comparison page, find your perfect product and apply online.
Fees and charges
On top of the interest charged, you will usually be charged a number of fees. The main ones are:
Lender arrangement fee – This fee is usually between 0.75-2% of the loan amount and is charged when the application completes and the funds are released by the lender. This fee can usually be added to the loan.
Broker fee – Most brokers charge a fee for their service, often 1-1.5% of the loan amount. We don’t charge fees for loans over £100,000.
Valuation fee – The valuation fee (also known as a survey fee) is a fee paid to a chartered surveyor of the lender’s choice. The cost of appointing a surveyor varies depending on the type, location and value of the property.
Legal fees – Again, these fees vary depending on the transaction type, loan size and lender.
How to get a business mortgage
The documents required when making an application
When making a new application, you must generally provide the following:
- Your latest 2 years trading accounts
- Proof of ID & address
- Asset & liability statement
- 6 months of business & personal bank statements
Commercial mortgage applications can usually be completed in 6-8 weeks. This will, of course, depend on how quickly, and to what quality, information is given to the lender. The other key factors that can affect the speed of completion are the valuation and legal process. Mortgage valuations can often take some time, and therefore cause delays.
The legal process can be more complex than residential property conveyancing, so your solicitor must be experienced in dealing with these transactions. If your application is urgent and needs to complete more quickly than this, just let us know and we will expedite it to meet your timescales where possible.
Using a broker
A lot of lenders negotiate their rates on a case by case basis. A good broker can be invaluable in this situation as they will be both experienced in negotiation, and able to leverage their relationship with the lender to push for a better deal.
Of course, this must be offset by the cost of fees for brokers who charge a fee for their service. We don’t usually charge fees on business mortgage applications over £100,000.
Who offers business mortgages?
There are three types of owner-occupied commercial mortgage lender. They can be broken down as follows:
High street banks – These lenders offer the lowest rates, but only lend to the strongest applicants. As such, their criteria tend to be strict and issues such as adverse credit or previous business failures could see your application be declined.
Challenger banks – These lenders are a little more relaxed in their approach, but charge a slightly higher fee as a result. They have a number of advantages over high street lenders, such as more relaxed affordability requirements.
Specialist commercial lenders – Mortgages from these lenders are more expensive, with rates often coming in at around 7%. They tend to take a very relaxed approach to issues such as previous business failure, adverse credit and issues around proving affordability.
Can I get a business mortgage on my home if I run a business from there?
This depends on how much of the property is used for business purposes. Use of a home office is usually not enough, and a residential mortgage would be both cheaper, and more appropriate.
A B&B business with owners’ accommodation would be classed as a commercial property and would need a commercial mortgage. As there is no right or wrong answer, we’d be happy to let you know which product would be most suitable for your circumstances if you’re unsure.
Will I have to switch my commercial banking?
Different lenders take different views in this area. Some lenders will insist that you switch all banking to them as a condition of the loan. In cases such of these, the loan will be dependent on the switch.
Sometimes we will be able to negotiate this position to ensure you only have to have certain payments going through the account or even remove the requirement altogether.
If the idea of changing banks is something you are keen to avoid, then you should make the lender or broker aware straight away.
A broker will usually still be able to offer you a mortgage without the need for banking to be switched.