Commercial mortgages are long term business loans secured against a commercial property such as a hotel, shop, office or factory. They are similar in some ways to residential mortgages and a 15-25 year term is normal. They are commonly used to purchase business premises to operate from.
What Are Commercial Mortgages Used For?
Businesses use them to buy or develop:
- Business premises for own use
- An existing business with premises
- Property to let
- Land for development
They can also be used to refinance an existing property to release capital for business development.
Commercial mortgages are a type of Asset Based Lending, although typically longer term than other sources.
How Do Commercial Mortgages Work?
Commercial mortgages vary greatly as every property and business applicant is different. Providers have their own lending policy, criteria and rates. Many specialise in certain industries or property types, such as shopping centres. Loans start at around £75,000 as lower amounts maybe uneconomical for lenders.
The lender decides on the Loan To Value (LTV) ratio based on:
- Their lending criteria
- Property value and ease of resale
- Viability of the business and ability to repay
- Credit history
LTV can range from 50% to 90% depending on the strength of the application, and 70% is often accepted as the norm.
Interest rates may be in the range of 2% to 6% above Bank base rate and fluctuate in line with the current financial climate. The lender charges an Arrangement Fee of approximately 1.5% to 2% in addition to the interest charges. A lender may also advance a VAT loan, which is a type of bridging loan repayable when VAT has been claimed back.
Advantages Of Commercial Mortgages
- Tends to be cheaper than a commercial lease
- Can be a valuable investment when property values rise
Disadvantages Of Commercial Mortgages
- The premises are at risk if payments are not met, which could mean losing the business too.
- A mortgage is a long term commitment. Ensure that short term business funding is not a better fit.
- A lender may apply subletting conditions or other usage restrictions on the property.
How To Go About Getting A Commercial Mortgage
Alternative providers are generally better than high street banks at customising deals to individual circumstances. The loan term, interest rate and fees are almost always negotiable for strong applications. Typically an applicant will use a broker to scour the market for the lowest rates and the highest probability of success.
Lenders want to see ability to repay over the term of the mortgage. A solid business plan along with full accounts for at least two years plus cash flow forecasts will be needed for your business, or the business being purchased. Personal asset and liability statements for each name on the application are critical for lenders to assess the people involved.
Find The Best Commercial Mortgage For You
Getting the best deal for your needs and financial situation is a job for specialists. Request a free and confidential professional consultation with our team today on 0345 50 50 888.