Commercial Mortgages

Commercial mortgages explained

What is a commercial mortgage?

A commercial mortgage, also known as a business mortgage, is a type of secured loan that enables you to purchase properties for your business, including (but not limited to) office blocks, retail premises, factories and/or warehouses. As with residential mortgages, the property acts as collateral for the loan and may be repossessed if you fail to meet your monthly repayments.

What is the typical loan term for a commercial mortgage?

Commercial mortgages are generally a longer-term form of business financing, as repayment periods can range anywhere from five to 30 years.

Depending on their needs, businesses looking for shorter-term alternatives could consider a business loan, bridging loan or property development finance.

What is the typical rate charged by a commercial mortgage?

There’s no one-size-fits-all when it comes to business property finance, which is why commercial mortgage rates are typically set on an individual basis. A lender will consider a variety of factors before offering a deal, including how much you wish to borrow and over how long.

Like residential mortgages, the interest rate charged by a commercial mortgage will either be fixed or variable. That being said, you’ll usually find interest rates on commercial mortgages are more expensive than those charged by their residential counterparts due to the greater risk they present to lenders.

When can I use a commercial mortgage?

Commercial mortgages can be used for more than buying property; they can also be used to purchase land or help cover the cost of refurbishments, equipment and machinery.

But, bear in mind that in most cases you’ll need to borrow at least £25,000 when taking out a commercial mortgage. Those in need of a smaller amount may need to consider other options such as a business loan or asset finance.

What are the benefits of a commercial mortgage?

Of course, the main benefit of a commercial mortgage is it can enable you to purchase a property when you don’t have the necessary capital to hand.

However, obtaining a commercial mortgage can offer other advantages, including:

• Lower interest rates: Commercial mortgages usually charge lower rates than unsecured business loans as they present a smaller risk to lenders.

• Tax-deductible interest payments: Any interest paid on your loan can be subtracted from your business’ taxable income, thereby reducing your overall tax liability.

• Greater flexibility and stability: Buying a property with a commercial mortgage could offer more flexibility and stability as you won’t be beholden to a landlord or subject to unexpected rent hikes.

• Opportunity to generate profit: Depending on market conditions, you could turn a profit when selling your property later down the line. You could also generate income by renting out part of your commercial property.

What are the different types of commercial mortgages?

Commercial mortgages come in a range of shapes and sizes to suit the varying needs of different businesses. Perhaps the most common types are owner-occupied commercial mortgages and commercial investment mortgages, although it’s also possible to find mix-used commercial mortgages and specialist buy-to-let mortgages for limited companies.

Find out more about the different types of commercial mortgages below:

Owner-occupied commercial mortgages

As their name suggests, owner-occupied commercial mortgages can be used to buy a property from which you operate your own business. A hairdresser purchasing a salon, a florist buying a shop or a business owner investing in an office block are all examples of when you might need an owner-occupied commercial mortgage.

Commercial investment mortgages

In contrast, a commercial investment mortgage can be used to purchase a property with the intention of leasing it to a business in order to generate revenue. For instance, an investor may buy a property on the local high street and rent it out to a retail store.

Mixed-used commercial mortgages

Mixed-use commercial mortgages (also known as semi-commercial mortgages) can help finance properties used for both business and residential purposes. A common example of this is when a premises such as a pub, shop or café, has living quarters attached (e.g. a flat or annex).

Limited company buy-to-let mortgages

Landlords that have established a limited company for the purpose of overseeing their rental portfolio will need a specialist buy-to-let mortgage. You can find out more about and compare buy-to-let mortgages for limited companies using our dedicated chart.

How to get a commercial mortgage

There are several steps involved in getting a commercial mortgage and the entire process can take anywhere from a few weeks to a matter of months to complete. To secure a commercial mortgage for your business, you’ll need to:

• Conduct research: With so many different lenders to choose from, borrowers should take time to consider their options, compare commercial mortgage rates and find a deal that best meets the needs of their business. Our chart above provides more information on some commercial mortgage lenders; alternatively, you could enlist the help of a specialist commercial mortgage broker.

• Obtain a Decision In Principle (DIP): After finding a commercial mortgage lender, asking for a DIP, or Agreement In Principle (AIP), may provide an idea of how much you can borrow. That being said, it’s important to remember a DIP isn’t legally binding and doesn’t guarantee a lender will make you an offer.

• Fill out an application: Now you have a rough idea of how much you’ll be able to borrow, the next step in the process is to complete your application. We offer more information on this process below.

• Complete a survey and valuation: Before your application can be accepted, a commercial mortgage provider will likely need to carry out a valuation and survey of a property to help determine how much they’d need to lend.

• Conveyance: This is the legal process of transferring ownership of a property, which includes exchanging contracts and completion.

Commercial mortgage application process

As commercial mortgages are extended on a case-by-case basis, you’ll be asked to supply a lot of information about your business within your application to help a lender set the rate and repayment term. This may include, but is not limited to:

• Personal and business contact details
• Proof of identity and address
• Personal and business bank statements
• Financial records, including annual turnover and profit
• Comprehensive business plan
• Property details

You’ll usually also need a good personal and business credit score to get a commercial mortgage; if your score could use a boost, visit our guide which contains 11 steps you could take to improve your credit rating.

Do I need a personal guarantee for a commercial mortgage?

If your business operates in an unpredictable industry, doesn’t have an extensive trading history or record of meeting repayments on time, a lender may ask for a personal guarantee to provide additional security.

This would leave you personally responsible for settling the debt if your business was unable to repay the money it had borrowed.

What is the typical deposit for a commercial mortgage?

Many lenders require you to have a deposit between 20% and 40% of a property’s overall value in order to get a commercial mortgage. However, there are options available to those with smaller deposits (as displayed on our chart above).

Like residential mortgages, commercial mortgage lenders express how much of a property they’re willing to finance as a loan-to-value (LTV) ratio (i.e. the amount of money being borrowed versus a property’s overall worth). If you have a 25% deposit, for instance, you’d need a mortgage that caters for up to 75% LTV.

Where “Neg” is listed on our commercial mortgage comparison chart, this means a lender’s maximum LTV is negotiable.

What type of fees are included in a commercial mortgage?

When it comes to securing a commercial mortgage, many of the same fees apply as when getting a residential mortgage. This includes:

• Surveyor fees
• Legal fees
• Product fees
• Broker fees
• Stamp Duty Land Tax (SDLT)

You may also want to consider taking out commercial property insurance, business contents insurance or, if you’re a landlord, buy-to-let insurance; you can explore different types of business insurance and providers using our dedicated chart.

Risks and considerations of commercial mortgages

Commercial mortgages aren’t without risk; your property may be repossessed if your business fails to meet repayments, or you may become personally liable for the debt if you signed a personal guarantee.

What’s more, interest rates and the value of your property can fluctuate over time in response to ever-changing market conditions which in turn could impact the affordability of your commercial mortgage.

Are commercial mortgage regulated?

While most commercial mortgages are unregulated, there are some instances when they may be subject to Financial Conduct Authority (FCA) regulation. For instance, a commercial mortgage must be regulated when 40% or more of the property acting as security for the debt is used for residential purposes. If in doubt, speak with a commercial mortgage broker.