Commercial mortgages enable you to purchase (or re-finance) property or land intended for commercial purposes. The nature of commercial mortgages is quite complex. Our outline helps prepare you to compare commercial mortgages, and seek expert advice from a commercial mortgage broker.
Before you begin your commercial mortgages comparison…
If you have a lot of capital and only require a smaller amount to purchase land or property for your business, you might consider a business loan. Sometimes, a business loan is better for your bank balance if you require a smaller, sum of capital to complete your property purchase.
Specifically, if the amount you wish to borrow is under £25k you’ll probably be better off with a business loan. Commercial mortgages suit borrowers seeking loans upwards of £50k. Lenders can also set minimum commercial mortgage loan requirements. A qualified mortgage broker can explain the details.
If you seek an unsecured loan, it may be worth asking your advisor about business loan options. A business loan is also worth consideration if you have watertight plans to pay off the loan inside a three year period.
It’s essential to develop your business in order to maximise profitability. A commercial mortgage may unlock capital for your business. There are two main types of commercial mortgages available:
– Owner-occupier: purchasing premises for your business. Perhaps with the view to bolstering your working capital, expand your premises and invest back into your business.
– Commercial investment or buy to let commercial mortgage: purchasing premises to rent out to another business.
The best commercial mortgage for you will be influenced by your budget, premises and business purpose. A qualified mortgage broker specialising in commercial mortgages will help you review your options and provide sound advice.
Commercial mortgages attract a higher interest rate compared with residential mortgages. Lenders consider businesses to carry a higher level of risk. For example, in most cases, there is no fixed rate of interest available. However commercial mortgages usually offer more attractive interest rates than most business loans because the property can be used as collateral.
The best way to convince lenders of your viability as a borrower is through your deposit amount. The higher your deposit, the lower your interest rate. Most lenders require at least 20% deposit, although this will still attract a higher rate of interest. If you can invest 30% deposit or greater, you will invite a much better deal with your lender.
The bulk of commercial mortgages are charged a variable rate of interest. The closest comparison to a residential mortgage would be the Tracker residential mortgage. However, unlike residential mortgages, your rate of interest is not decided at the start. Lenders adhere to a risk profile. If your application is beyond their risk profile, your application will be denied.
Administrative charges such as arrangement fees are typically charged at 1-2% of the loan amount (for loans up to £1m). Bear in mind that some lenders require your arrangement fee before your commercial mortgage is approved. However, your arrangement fee is generally paid after approval.
Following acceptance of an indicative offer, you will need to pay your valuation charges. As you would expect, the valuation requires an inspection and a written report by a qualified valuer. Valuation fees are charged on a case by case basis. You can expect to pay upwards of £500 for a straightforward commercial valuation.
You are also liable for legal fees. These include your lender’s legal fees. Commercial mortgage legal fees are anything from £500 for each individual party. If you use a qualified commercial mortgage broker, they will need to be paid. You can expect to pay 1% of the value of the loan.
While lenders have tightened their eligibility requirements in recent times, your broker will be able to help you navigate these. You are usually required to provide evidence of your business’ fiscal health. This includes debt and cash flow. Lenders will also want to analyse your financial forecasting to determine whether you can repay your loan. Information such as how you intend to cover the cost of your deposit, as well as comprehensive evidence of assets, income and other credit will be required.
Don’t make the mistake of assuming your less than ideal credit history instantly precludes you from a commercial mortgage. Lenders will consider your application. You will most likely pay a higher rate of interest, but you may still be in the running.
There are a couple of significant advantages to a commercial mortgage. Any increase in property value might be reflected in an increase in your capital. Interest charges related to a commercial mortgage are tax-deductible.
Many business owners are opting for commercial mortgages during the pandemic to secure additional financial support for their business. Their reasoning includes:
– lower rate of interest
– decrease monthly outgoings
– extra support as the pandemic continues
Lenders have responded to the pandemic with the expected degree of caution. They’ve lowered their LTV (loan to value) ratio. Tougher screening for potential borrowers means more information is required. It’s not impossible to secure a commercial mortgage but it is harder. It is important that you thoroughly prepare your paperwork for lender perusal.
Lenders will look closely at your business history, present needs and forecasting. The great news is these small businesses form the solid base of commercial mortgage clients for lenders. This means that lenders are used to working with businesses just like yours.
Our technology enables you to compare commercial mortgages based upon your specific criteria, identifying appropriate lenders and providing indicative rates.