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Should you take out a commercial property mortgage or rent instead?
There are generally two distinct types of commercial property mortgage – one is essentially an owner-occupier mortgage where you're looking to buy a property for trading premises, and the other is a commercial investment mortgage, if you're purely looking to invest in commercial property and perhaps want to let it out to a third party (in which case, it may be viewed as commercial buy-to-let). The one you choose could have an impact on the kind of finance and resulting rates you're offered, so as with everything else in this complex area, you'll want to seek the support of a commercial property finance specialist to navigate the market.
Bear in mind that, whichever kind of mortgage you're after, you probably won't be able to buy the property in full by using this kind of loan. Mortgages for business generally require a deposit of around 25% to 40%, but in some cases you may be able use another property as security, provided you have considerable equity in it. Most commercial mortgage rates are variable and you'll be able to choose from a range of terms, typically from three years to as many as 40, but 15 to 30-year terms are generally more common. Shorter term commercial property finance is also available, but this is more commonly referred to as a property development or bridging loan.
Obtaining a commercial or business mortgage is based on the ability of your business to make the repayments, so you'll not only need to be confident that your business can cover it, but that you can prove it to potential lenders. You may need to provide a detailed business plan which demonstrates that you can make the repayments, and a professional valuation will usually be required before commercial property finance can be secured.
Generally speaking, you shouldn't have any trouble finding a commercial mortgage through high street lenders, though you may have to move your business banking facilities to the new provider if you're going to achieve the best terms. Conversely, you could always approach a specialist lender who won't want your business banking, and they may offer interest-only payment terms and loans with lower deposit requirements, the trade-off being that rates tend to be higher.
Looking to secure the best commercial mortgage rate for your business? You'll want to seek the support of a commercial property finance specialist to navigate the market as you may find that certain deals are only accessible through an intermediary.
This will depend on the type of commercial property finance you're looking for. If it's for owner-occupied property, you'll generally be able to find a mortgage at up to 70-75% loan-to-value (LTV), provided you can supply the necessary deposit. You'll be subject to a rigorous affordability assessment, too, which means the amount you can borrow will be dictated by the amount you're able to provide upfront and related affordability criteria.
It's a little different when it comes to a commercial investment mortgage. Here, the amount you'll be able to borrow will depend on the expected rental income generated by the investment, but even so, the mortgage typically won't be able to exceed 65% of the initial purchase price. In some cases, you may be able to find a deal with lower deposit requirements, but you'll be required to provide significant collateral instead.
Commercial mortgage interest rates will vary according to the lender and your individual requirements, with strict underwriting procedures and affordability assessments in place. In general, commercial mortgage rates in the UK are determined by a thorough assessment of your business – lenders will analyse your past performance, the current position and long-term plans of the business (or the one you're considering) before deciding viability and quoting an interest rate. Because of this bespoke nature, rates are negotiable rather than set in stone, but they may be higher if the underwriter identifies higher risk in the proposal.
Rates tend to be variable and are often based on LIBOR or base rate. They're typically quoted as "X% over base rate", similar to tracker mortgages in the residential sector. In some cases, you'll be able to find commercial investment mortgage rates that are fixed, but these aren't the norm.
100% LTV (loan-to-value) commercial mortgages are generally quite rare, and those that are available will typically charge much higher fees and rates. Instead, try to get at least a 20% deposit together which will give you more choice and better terms.
The commercial sector is incredibly complex, and this is reason enough in itself to use a commercial mortgage broker. Not only do they have suitable knowledge of the sector, but they also have the necessary contacts to help you find the best deal, giving you access to options you may not be able to find on your own.
You need to be fully co-operative in all dealings with your broker as they'll be the one presenting your case to lenders on your behalf, and don't use several brokers at once, as you could end up without any kind of deal. Be vigilant and look for brokers who are members of the National Association of Commercial Finance Brokers (NACFB, the professional body of the industry), as they'll have the necessary professional indemnity insurance and are required to stick to a code of practice, ensuring a thorough and professional service.
The greatest restrictions tend to be in terms of the security you're required to provide. This is typically the property itself, together with a cash deposit, but if you're not able to stump up the cash you may have to offer additional security such as another property or a charge over other assets.
Other restrictions could arise in the form of leasehold property, with it generally only being possible to secure mortgages for business if the lease has more than 70 years remaining (if not, additional security could again be required).
Then there are the fees involved. These can be wide-ranging, and you may come across any or all of the following:
These are typically 1-2% of the loan amount (but for smaller loans they may be higher), and are usually added on completion of the loan.
Alongside the arrangement fee, some lenders will charge a 'commitment fee' in order to cover the work they undertake if you don’t accept the offer. This is non-refundable and will usually be payable upfront as part of your formal application.
A valuation will be required as part of your application, and will often be far more in-depth than in the residential sector. The price can vary depending on the complexity of the property and the case, and much like the eventual mortgage rate, are based on a bespoke quotation.
When arranging a mortgage for a commercial property, you'll be required to pay your lender's legal fees as well as your own, with the eventual price again determined by your individual case.
As mentioned, using a commercial mortgage broker can be a great way to access the best deal, but you'll need to pay for the privilege; you can expect fees of up to 1% of the loan value, arranged when they've found you a loan offer based on your pre-agreed terms.
Frequently asked questions related to commercial mortgages:
No. Generally speaking, these mortgages are in the realm of unregulated lending; there may be some cases where they're regulated (such as if you were buying a property to live in as well as run a business from, in which case the waters become slightly murkier), but this is the exception rather than the rule. This makes it even more important to speak to a broker who's a member of NACFB for complete peace of mind.
Yes. In much the same way as in the residential sector, it's perfectly possible to refinance this kind of mortgage, in that you'll pay off your existing loan by replacing it with a new one. This may be to free up cash or secure a better interest rate, but while it's possible, it doesn't mean it'll be easy – it could be an expensive process as you may be hit with early repayment charges and new booking fees, for example, so make sure to weigh up the pros and cons of refinancing.
Occasionally, but not very easily, and you'll usually have to stump up something significant as security (such as another property or other assets).
Yes. One of the advantages of commercial mortgages, compared to alternative routes, is that the mortgage interest is tax deductible.
A lot of it is down to risk and the terms of the mortgage itself. With mortgages for business, the ability of a borrower to make repayments is dependent on the performance of the business, and if it doesn't perform, the bank will have limited assets from which to make its money back. It's also harder to assess the creditworthiness of a business, particularly a new one, and terms tend to be a lot shorter, too.
In essence, a commercial investment mortgage is a buy-to-let mortgage for commercial tenants, with only the terminology being different. In traditional buy-to-let, a private landlord rents out a property to residential tenants, whereas under a commercial arrangement, the property is let to a commercial enterprise. Nonetheless, the term "buy-to-let commercial mortgage" is rarely used, as it's simply thought of as a commercial investment loan.
Not generally. When giving a commercial mortgage, lenders want to see their money being fully repaid - both capital and interest. However, with investment mortgages, lenders do understand the tax position of their customer, so in these cases they will help by not insisting on capital repayment so long as the LTV is below a certain amount (often 60%), allowing the borrower to pay interest only.
A lender will require to see proof that the proposed loan would be affordable to the borrower, to do this the lender will normally ask to see the last three years’ accounts to prove this. If your business has been trading for less than three years, you will not be about to show the accounts needed, however exceptions can be made and a professional standard business plan would be essential in arguing the case for loans where affordability is not readily apparent.
Don't forget, the support of a commercial property finance specialist can help you through the application process and increase your chances of getting approved.