Commercial Mortgages
What is a commercial mortgage and what kind of properties can it be used for?
Commercial finance is used to purchase or refinance a commercial property, such as offices, shops, factories and even land. Let’s take a more detailed look at how they work in practise and where to get them from.
Welcome to our guide on commercial mortgages.
Whether you’re wondering when you would need a commercial mortgage or want to understand the borrowing criteria, we have you covered.
Along with lender requirements and FAQs, we’ve included information on the types of properties that require commercial mortgages. With our helpful expert guidance, you’ll be equipped with all the tools you need to explore commercial mortgages with confidence.
- What is a commercial mortgage?
- What kinds of properties require a commercial mortgage?
- How do commercial mortgages work?
- Types of commercial mortgage
- Eligibility
- Deposit criteria
- Security and personal guarantees
- Important factors
- Covenant strength
- Getting a good deal
- What a commercial mortgage broker can bring to the table
What is a commercial mortgage?
A commercial mortgage is a loan that’s secured on a property that’s used for business purposes. Commercial properties range from office buildings to apartment complexes, shops and offices (among others) that provide a space for businesses to operate and thrive.
Unlike residential mortgages, which are taken out by individuals or families to purchase homes, commercial mortgages are used by businesses, investors, and property developers.
Let’s dive deeper and explore why you might consider taking out a commercial mortgage. Perhaps you’re a business owner-occupier looking to expand your operations or a commercial property investor seeking to purchase a property as a long-term investment.
Alternatively, you could be a residential property investor eyeing a multi unit freehold block.
Whatever the reason, a commercial mortgage can be a valuable tool for funding the purchase of a commercial property.
Finance is also available for initially purchasing a plot of land for your business. For example, holiday park finance can be used to help setup a holiday park, which hosts multiple units such as lodges, cabins, pods etc.
So, if you’re in the market for a commercial mortgage – or if you’re curious to learn more – we invite you to explore your options with us. And when you’re ready, we can put you in touch with one of the UK’s most experienced commercial mortgage brokers.
What kinds of properties require a commercial mortgage?
Commercial mortgages can be used to purchase a wide variety of property types that are primarily used for business purposes. Here are some examples that typically require a commercial mortgage:
OfficeS
From small office units to large city centre office blocks, any property used as a workspace for businesses could require a commercial mortgage.
Retail
This could include individual shops, retail units within shopping centres, or large out-of-town retail parks.
Industrial
Factories, warehouses, and other industrial premises would require a commercial mortgage. This also includes light industrial units and high-tech industrial properties.
Leisure
Properties like hotels, restaurants, pubs, gyms, and sports facilities generally fall under the commercial mortgage umbrella.
Healthcare
This could include nursing homes, hospitals, medical centres, or dental practices.
Agricultural
Farms and other agricultural properties will require a commercial mortgage, especially if they are being used for a profit-generating business.
Multi-UNIT
Blocks of flats or HMOs (Houses in Multiple Occupation) may require a commercial mortgage, depending on their size.
Mixed-Use
These are properties that combine any of the above, such as a shop with residential flats above it.
Remember, each lender will have its own criteria and may specialise in certain types of property or business activity. So, while this list provides a general guideline, it’s always best to consult with a commercial mortgage broker to understand the best options for your specific circumstances.
How do commercial mortgages work?
Commercial mortgages can be a great option for businesses engaging in property investment. Not only do they offer better interest rates than unsecured commercial loans, but the repayment costs are often less than renting.
Commercial loans generally last from 10 to 25 years. In most cases, lenders will cover between 60% to 75% of the freehold property value. Some lenders offer loans against the “going concern value” of a property, but it’s important to be aware that additional security may be required.
There are two types of mortgages you can choose from: repayment and interest-only. With a repayment mortgage, you’re paying back the principal amount and the interest on a monthly basis. If you opt for an interest-only mortgage, you’ll only be paying the interest for the duration of the loan term. However, keep in mind that lenders will want to know how you will repay the loan in the end.
It’s important to note that the amount you can borrow will usually depend on the business’s ability to repay the loan. Lenders will look at factors such as the business’s income, its existing debts, and the value of the property being mortgaged.
As a result, the application process for a commercial mortgage can be more rigorous than for a residential mortgage.
Types of commercial mortgage
There are broadly two main types of commercial mortgages, and the one you will need depends on how you will be using the property.
Commercial owner-occupied
The owner-occupier mortgage is perfect for businesses looking for a property for their own use.
Owning a commercial space comes with many benefits, including having an asset that increases in value over time, rather than paying rent every month that doesn’t contribute to your net worth.
Plus, you’ll be in total control of your space, meaning no more worrying about sudden eviction, and no more unexpected changes, service charges or rent reviews.
Commercial investment mortgages
A commercial investment mortgage is ideal for businesses that are considering buying property to rent out.
By renting it out to businesses on long-term leases, you can sit back and enjoy the rental yield as well as the appreciation of the asset.
You can even find ways to increase the value of the site by changing the use to better reflect the demand in the area. For example, a high street building can be converted to provide residential dwellings, which can be sold or rented out.
But what many business owners don’t know is that it’s unlikely that any lender will give them 100% of the property cost. In fact, most lenders ask for deposits that range from 25-40% of the property price. That’s where a skilled and reputable broker comes in. They can help find the best deals available for your company so that you get the best finance possible.
With that being said, it’s no surprise that finding the right commercial mortgage can be confusing and overwhelming. But don’t worry, with an experienced broker by your side, you can be certain to find a deal that meets your investment goals and budget requirements.
Talk to an expert who will:
Save you money, time and make buying your property easy
Work around your schedule to help you arrange a mortgage that suits your circumstances, no matter how complex
Give you access to the different commercial mortgage lenders on the market and help you find a deal that’s actually worthwhile
Eligibility
If you’re looking to get a commercial mortgage for your business, it’s important to understand the eligibility requirements.
Generally speaking, lenders will want to see assurances that you have the ability to make the monthly repayments on time. This will mean providing some key details about your financial situation and your business plans.
Potential lenders will start by reviewing your background and experience. They’ll want to see that you have a solid track record of success, preferably within your chosen industry.
In addition to this, they’ll also look at your business plan. This should include detailed information about how you intend on using the funds you borrow, as well as how you will generate revenue moving forward.
When it comes to assessing your eligibility, lenders will conduct background checks, including a review of your net worth and the source of your deposit.
They’ll also take a look at your personal and/or business bank statements to see if you have a history of good account conduct. Finally, they’ll assess your historical financial accounts for the past two to three years, either for your current business or the business you’re looking to purchase.
Then the lender will move on to the next stage of the process. This involves an independent valuation of the freehold and/or a business appraisal.
The valuers will take a closer look at the value of the trading business, splitting out the business (goodwill) and freehold values.
Alternatively, if you’re planning on letting the investment out to a third party, they’ll look at the market rent, quality of the tenant/lease term remaining, and price per square foot with comparable evidence of previous sales included.
It’s important to note that a bad credit rating won’t necessarily prevent you from getting a commercial mortgage, but it can make the process more challenging. Similarly, if your business hasn’t been trading for long (under three years), lenders may be more cautious about investing. This could affect the amount you can borrow, or the terms of the loan.
Deposit criteria
Commercial mortgages typically have a lower loan-to-value (LTV) ratio compared to residential mortgages. This means you’ll need to provide a larger cash deposit.
While a residential mortgage might offer an LTV of up to 95%, commercial mortgages often have an LTV of around 60% to 75%.
So, if you’re purchasing a property worth £1 million, you might need to put down £250,000 to £400,000 upfront, plus costs.
Security and personal guarantees
The commercial property itself will serve as legal security for the loan, meaning the lender will take a first charge and can repossess and sell the property if repayments are not met.
In addition, lenders often require personal guarantees from the business owners, especially for small businesses.
This means that the owners become personally liable for the loan, if the business fails to meet repayments.
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Second Charge Mortgages
It’s important to get expert advice when taking out a second mortgage as there are a lot of things to consider.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Complex Mortgages
A complex mortgage could be considered any situation that does not fit with the standard lenders. Typically this would be borrowers who have multiple income streams and/or properties of non-standard construction.
Important factors
When it comes to securing a commercial mortgage, there are several key factors that you need to keep in mind, beyond just the interest rate! After all, it’s the smaller details that can make all the difference in the long run.
First and foremost, the loan-to-value (LTV) will play a major role in determining your commercial mortgage rate. This is because the more equity you have in your property, the lower the risk you pose to the lender. So, if you’re able to invest more in the property upfront, you’ll likely be rewarded with a better deal.
But that’s just the beginning! The sector that your business operates in will also play a big role in determining your rate. Sectors that are deemed recession-vulnerable, like retail, hospitality, pubs, and hotels, will usually command higher rates, whereas essential services like GP, dentist, and veterinary surgeries tend to enjoy the best rates.
Another factor to keep in mind is the type of commercial mortgage you choose. Fixed rates will offer more stability in a market that can be notoriously unstable, but they’re often pricier than variable rates.
And let’s not forget about your experience as a business owner.
If you can demonstrate a proven track record of success in your sector, along with strong financials, you’ll be more likely to secure a lower mortgage rate, or perhaps a slightly higher LTV.
Finally, don’t overlook the impact of geography. It might seem unfair, but some areas are simply less vulnerable to economic downturns than others. So, if you’re looking to open your business in a prime location like London, you may be able to secure a better deal than if you were considering a property in Mansfield or Bolton.
Keep all of these factors in mind, and you’ll be well on your way to securing the best possible commercial mortgage rate for your business!
Covenant strength
The ‘tenant’s covenant strength‘ refers to your tenant’s financial ability to meet their lease obligations, including rent payments, maintenance costs, and other related expenses.
A commercial lender will consider the covenant strength of your tenant as part of their risk assessment. A strong tenant covenant gives the lender more confidence that the rental income from the property will be stable and reliable, thereby reducing the perceived risk of the loan.
It is highly relevant when the property’s rental income is being used to service the mortgage.
Therefore, when applying for a commercial mortgage for a leased property, it’s important to consider not just your own financial strength, but also that of your tenants.
Getting a good deal
The world of commercial mortgages can seem like a complex landscape, but with the right guidance, it doesn’t have to be.
The key could lie in partnering with a seasoned commercial mortgage broker, a move that could not only get you a good deal but also deliver top-notch service.
Commercial mortgages, as you know, are loans secured on commercial property like shops, offices or industrial units. They’re primarily used to buy business premises, invest in commercial property or to refinance an existing loan. As with any financial commitment of this magnitude, it pays to have an expert by your side. This is where a commercial mortgage broker comes in.
A broker is a trained and regulated professional who acts as an intermediary between you and the potential lenders. They have the know-how and the connections to navigate the complex commercial mortgage market, helping you to find the best possible deal.
Here’s what a commercial mortgage broker can bring to the table
If you’re financing a property purchase, you may be wondering why you should use a commercial mortgage broker. Well, there are a whole host of reasons that you’ll kick yourself for if you don’t!
Sure, some high street lenders offer commercial mortgages – but there’s plenty more where that came from. There are numerous commercial mortgage lenders that you won’t find on the high street, which means that you’ll miss out on some of the most competitive rates and deals, if you only knew where to find them.
In fact, some lenders won’t even consider applications directly from borrowers – they exclusively work through brokers.
Expert Knowledge
The world of commercial mortgages can be confusing, with many variables to consider. A broker has the expertise to simplify this process, helping you understand the pros and cons of different options and guiding you towards the best choice for your circumstances.
Access to Exclusive Deals
Commercial mortgage brokers often have access to deals not available to the public. They can tap into their extensive network of contacts in various lending institutions, securing terms that you won’t be able to find on your own.
Time and Effort Saving
Finding the right mortgage is a time-consuming process. A broker does the heavy lifting for you, comparing rates, terms, and conditions from multiple lenders. This leaves you free to focus on what you do best – running your business.
Personalised Service
A good broker will take the time to understand your business, your goals, and your financial situation. This enables them to find a mortgage that’s tailored to your needs, rather than a one-size-fits-all solution.
Support Throughout the Process
A broker doesn’t just find you a mortgage and then leave you to it. They’ll be with you every step of the way, from the initial application through to completion, providing advice and support when you need it.
In essence, a UK commercial mortgage broker could be your compass in the challenging landscape of commercial property finance. With their help, you can secure a deal that’s not just good on paper, but truly beneficial for the long-term growth and stability of your business.
Ready to embark on this journey? Let Respect Mortgages introduce you to one of the best commercial finance brokers, and take the first step towards your new commercial mortgage.
Call us on 0330 030 5050 or click the button below.
