Commercial Mortgages

A Commercial Mortgage is a long-term loan (typically up to 25 years) that is used to purchase (or refinance) any land or property used for business purposes. Just like a traditional residential mortgage, money is borrowed and secured against a property. While there are less Commercial Mortgage products available on the market, their overall value is higher than residential mortgages.

You can take out a commercial mortgage for many different purposes, such as:

• To buy business premises (and save on monthly rent)
• To secure land for development
• To expand an owner-occupied business
• To add to a buy-to-let portfolio
• To release capital for investment or growth
• To consolidate business debts
• To buy new equipment
• To sub-let or lease part of the building for additional income

Using a commercial mortgage to purchase a business premises can lead to long-term capital gains. If the property goes up in value, the business capital does too. As the equity rises, this can then be used to re-invest into the business to fund expansion or purchase additional investments.

There’s plenty of choice in commercial mortgages for businesses including:

• Shops
• Offices
• Factories
• Warehouses
• Restaurants
• Pubs
• Hotels and B&Bs
• Working farms
• Mixed-use properties

Given that most lenders will provide up to 70% LTV, this means you will be required to provide a deposit of 30%.

Most lenders will understand that many companies are asset rich but cash poor and therefore will accept security from an existing property.

Due to being higher-risk than a residential mortgage, interest rates on a commercial mortgage are higher, too. Commercial Mortgage rates usually start from 2.95% , and will differ from lender to lender based on the amount borrowed and the loan term.

With a variable commercial mortgage, the rates are set against the Bank of England so will change based on the set rate at the time. Conversely, with a fixed rate mortgage, the rates are locked in for a specific period of time.

Given that commercial mortgages are used for business purposes, limited companies, SPVs, LLPs, partnerships and sole traders can typically apply for a commercial mortgage. Additionally, some lenders will even consider clients with poor credit, low income and start-ups.

Although the criteria varies from lender to lender, most lenders will take the following into consideration:

• Cash flow
• Level of debt
• Property usage
• Current and projected business income
• Ability to repay the loan
• 3 year’s trading accounts
• Asset and liability statements
• Last 3 months’ business bank statements
• Certified proof of ID
• Proof of residency (utility bill or bank statement)
• Details and profiles of all directors and partners of the business

The exact amounts will vary across the market, however you can typically expect to pay:

• Broker fee
• Application fee
• Valuation fee
• Arrangement fee
• Legal fee
• Exit fee
• Administration fee

It’s possible to find commercial mortgages for businesses that are just starting out. But your options will be limited, as lenders typically want to loan to established businesses with proof of profitability. For a start-up business, you’ll probably need to put down a deposit of at least 40%. And interest rates are typically higher at around 7% per year.

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