A commercial mortgage is a long-term loan secured against a non-residential property. In the UK, business mortgages typically cover up to 75% of a property's value and are repaid over a term of 3 to 25 years. While a buy-to-let mortgage is one type of commercial mortgage, there are also other options tailored to different business needs.
The amount you need to borrow can determine the type of loan you need to take out. If you’re borrowing up to £25,000, you might be eligible for an unsecured business loan. But if you’re looking to borrow more, your lender will want security. And that’s where a business mortgage comes in.
A commercial mortgage functions similarly to a residential mortgage but is specifically for business premises. It can be used to purchase a property your business currently occupies or plans to move into. Additionally, a commercial mortgage can be used to acquire property as an investment. One key benefit is that any interest paid on a commercial mortgage is tax-deductible.
Applying for a commercial mortgage follows a
similar process to a residential mortgage. You'll need to complete and submit an Asset
and Liability form along with your commercial mortgage application.
Additionally, you’ll be required to provide key business information, including:
Bank statements from at least the last three months
Trading figures for at least the last three years
Proof of identity and address
Tenancy or lease agreements, if applicable
To assess affordability, lenders may also request a business plan with financial
projections.
The property must be valued by an agent accredited by the Royal Institute of Chartered
Surveyors (RICS), and the lender’s solicitors will conduct all legal due diligence.
Once approved, the lender will issue a mortgage offer.
A commercial mortgage is a significant commitment for any business, so it's essential to carefully evaluate your options before starting the application process. With numerous commercial mortgage lenders available, each offering different types of business mortgages with varying interest rates and loan-to-value (LTV) ratios, choosing the right one can be challenging. LTV rates determine how much of a deposit you'll need to provide. Working with a commercial mortgage broker can simplify the process by helping you compare lenders and find the best mortgage for your business. At Bionic, we partner with Think Business Loans to compare competitive commercial mortgage rates from a panel of high street and challenger banks. Our business finance division at Think Business Loans understands how lenders assess applications, allowing us to match you with the right provider. Using our iFunds technology, we search across multiple lenders to find a mortgage solution that best fits your business needs.
Commercial mortgages are big deal for both the
lender and the borrower, which means the lending criteria is usually robust. Although
eligibility checks vary between lenders, you’ll most likely need to meet the following
conditions:
A good business credit score – Although not always a deal-breaker, having a good credit
score will help your application for a commercial mortgage. Some lenders will accept
applications from businesses with a bad credit rating, but these will come with higher
interest rates to reflect the added risk to the lender.
Evidence you can afford to pay a deposit alongside the repayments - Commercial mortgages
usually need a deposit of between 20% and 40% of the loan amount. You might need proof
of projected income as evidence that you can afford the deposit and repayments. This
might take the form of a financial health check that looks at cash flow, general income,
existing debts, credits, and assets.
Proof of income – This can be in the form of salary, self-employment, or even rental
income.
It might also help your application if you’re a homeowner.
A commercial mortage is a very specalised
product that’s generally available for larger amounts and can only be used for specific
purposes. But there are alternatives available if you need to borrow lower amounts or
need the money for reasons outside of property buying or development.
Bridging loans might be an option if you've bought stock or property and have a gap
between the payment due date and money becoming available to you (say you’re relying on
the sale of one property to fund the purchase of another).
Short-term loans could be worth considering if you need to cover costs without the
long-term commitment of a mortgage. These loans are usually available for smaller
amounts and need to be repaid within 12 months. This is often used for financial relief
to cover working capital, cash flow, and other expenses.
Asset finance is another short term loan option that is often used to finance any items
that appear on your balance sheet, such as equipment, fixtures and fittings, or
commercial vehicles.
Invoice finance may be an option if you’re owed money on outstanding invoices but need
the money now to cover cashflow. This allows you to borrow money against the amounts
owed to you on unpaid invoices.
Secured business loans are sometimes available for relatively large amounts, so long as
you have the necessary assets to use as security against the loan. That means that a
lender will be able to offer better repayment terms because the asset is used as a form
of guarantee by the borrower.
There are two main types of commercial property mortgage to choose from:
Owner-occupier mortgages - Used for properties you plan to run your business
from.
Commercial investment mortgages - Used for properties you plan to rent out.
You can take out a commercial mortgage loan on both an interest only and
capital repayment basis.
Interest only commercial mortgages keep monthly payments low and can help
from a cash flow position - but you’ll need to repay the full loan amount at
the end of the mortgage term.
The amount you can borrow and the commercial property mortgage rates you’re
offered will not only be affected by the current circumstances of your
business, but also by the type of loan you apply for.
There are a number of fees that come with all commercial mortgages, but the
amount you’re charged will depend upon the lender and the terms of your
loan. Typical business mortgage fees and charges include:
Arrangement fees – Usually added once the loan is approved, arrangement fees
paid to the lender for getting the funds in place and arranging the finance.
These fees are added to cover the work involved in setting up a loan and are
usually set at around 1% or 2% of the loan amount on borrowing of up to £1
million. Some lenders might ask for the arrangement fee to be paid earlier
in case they put in all the work, but you don’t take them up on the offer.
Valuation fees - Lenders need proof that a property is worth what you’re
willing to pay for it, and so a valuer needs to give the place a once over
and send a report to the lender. Fees are based on the type of report that’s
needed, but rates usually start at around £500, which is paid to the lender
once you’ve accepted an initial offer.
Legal fees – Charged for things like insurance, site surveys and preparation
of legal documents, it’s on you to pay legal fees for both yourself and the
lender. Costs vary, but usually start at around £500 for each party.
A commercial mortgage application can take anything from a few weeks to a couple of months. The length of time your application takes will depend upon a range of things, including your current circumstances, the lender you choose, and the complexity of the loan.
Lenders will usually offer commercial loans for 70% to 75% of the amount you need to borrow (known as loan-to-value, or LTV for short). This means you’ll need a deposit of 25% to 30%.
Although fees vary from broker to broker, you can expect to be charged up to 1% of the value of the loan. As part of the service your broker should give you guidance based upon your specific circumstances and present your application to the lender to give you the best chance of success
A semi-commercial mortgage is a loan for a property that is used for both
business and residential purposes, such as a flat with a shop above.
You can’t buy a residential property with a commercial mortgage. If you’re
looking to buy a property to rent out to domestic tenants, you’ll need to
apply for a buy-to-let mortgage. Similarly, if you want to buy a
non-residential property to rent out businesses, you should look into a
commercial buy-to-let mortgage.