What Defines a Commercial Mortgage?
Buying commercial property can have huge benefits over renting and can even become an income stream in its own right. It can also help future-proof your business and avoids the risk and instability of renting.
Keep reading to find out everything you need to know about commercial mortgages and see if it’s the right path for you.
A commercial mortgage is any mortgage over a property that you will not be living in and instead will be using for business use. The exception to this comes with mixed-use property. For instance, if you buy a property that includes a flat over a shop. Even if you intend on residing in the flat, its mixed-use designation means you’ll need a commercial mortgage.
You’ll need a commercial mortgage if you’re buying a property to let out, whether the property is residential or commercial. This means all buy-to-let mortgages are types of commercial mortgage.
Commercial mortgages cover properties such as:
- Industrial units
- Residential buy-to-let properties
- Mixed-use properties
CLEAR COMMERCIAL FINANCE are proud members of the National Association of Commercial Finance Brokers
Do Commercial Mortgages Differ From Residential Mortgages?
Commercial mortgages are different from residential as the properties they involve vary on a wider scale. Commercial properties often present much more to take into account and, as a result, you won’t find standard mortgage products for them.
There are a few major ways in which commercial mortgages differ from residential:
You’ll need a larger deposit when getting a commercial mortgage than a residential one. Deposits for buy-to-let are typically 25% or more and other types of commercial property could require 30% deposits or higher.
The lender will look at the type of business you intend on running from the property too. This can alter the deposit required as riskier businesses usually require larger deposits.
If you’re looking to get a buy-to-let commercial mortgage, it’s common to take out an interest-only mortgage instead of a repayment mortgage. Many buy-to-let landlords use the rental income to cover the increase and don’t pay down the capital. These are long-term investments and the lender is typically paid back with the sale of the property.
Higher Interest Rates
Commercial mortgages usually have higher interest rates than residential mortgages. There’s more risk attached to business ventures and property so lenders increase interest rates to compensate.
How Do You Know If You Need a Commercial Mortgage?
Not every business will need a commercial mortgage as business loans can sometimes be enough. A business loan can be up to around £25,000 and may suit your needs. The majority of property buyers will require a commercial mortgage if the loan is long term.
For short term needs, bridging loans may be more appropriate. These can be preferable if you need the loan much faster, if you are buying property at an auction, for instance. They can also be preferable if you only require the loan for a year or two.
Of course, many businesses rent their premises instead, especially when they’re starting out.
Should You Buy or Rent?
When you’re considering a commercial mortgage, it’s essential that you first work out whether buying is your best option. There are upsides and downsides to both renting and buying, making the decision a difficult one for business owners.
For established businesses or landlords interested in buy-to-let, purchasing property is a good option. When you own your property or land, you’ll have an investment that should hopefully pay off in the future.
Buying can offer your business the stability it needs and allows you to make any alterations you require without permission from a landlord. If you buy a property too large, you may be able to rent out sections of it to other businesses, creating a new revenue stream and avoiding unused space.
If you’re not sure of the size of property you need, renting can be preferable until you do. If you buy a property too small, you may have to sell it and buy a larger one, losing fees and other funds in the process. When you rent, you have more flexibility to move.
Renting puts you at the mercy of rent increases though and often involves lengthy leases.
How Do You Secure a Mortgage for a Commercial Property?
Applying for a commercial mortgage is much the same as applying for a residential mortgage but you will have to put together different paperwork and the application may take longer. The lender will have to assess more factors with a commercial property than with a residential property so it’s best to speak to a professional broker who can guide you through what you will need.
As commercial mortgages rates tend to be high, a broker will also be able to source the best deals based on your circumstances, history and business.
The general documents you may need to apply for a commercial mortgage include:
- Asset and liability form
- Mortgage application
- Tenancy agreements
- Bank statements
- Proof of address
- Trading accounts
- Property portfolio
- Mortgage history
- Proof of identity
- Business plan
You can apply to lenders on your own however a mortgage broker will simplify the process and find you a better deal than you might be able to get alone.
Types of Commercial Mortgage
There are two general types of commercial mortgage and it’s useful to know which one you’ll need as they have different features. Although commercial properties vary almost as much as the imagination, they will almost always fall under one of these categories.
Commercial Investment Mortgage
This is the type of commercial mortgage you’ll need if you intend on letting out the property. Buy-to-let mortgages fall under this branch, whether you’re letting residential or commercial property.
These mortgages are more commonly interest-only mortgages, where the rental income pays off the interest each month. You can apply for repayment mortgages though if you wish.
The interest rates for this type of mortgage can be higher than owner-occupier mortgages as they involve a higher level of risk to the lender.
A 25% deposit is usually considered the minimum.
Owner-Occupier Commercial Mortgages
When you intend on using your property for your own business, you’ll require an owner-occupier commercial mortgage. This also includes mixed-use properties where you’ll be resident.
This type of mortgage is most likely to be a repayment mortgage where you pay off the capital each month and therefore repayments can be higher than with an interest-only mortgage. Interest rates are usually lower than for an interest-only mortgage.
Fixed or Variable?
Most commercial mortgages are variable however fixed-rate mortgages are available in certain circumstances. Your mortgage broker can advise you which type of mortgage rate will be best for your situation and which are available.
What Fees and Charges Can You Expect?
Buying a property always comes with some fees attached to it so it’s important to factor these in when deciding whether to purchase a commercial property.
The lender will require a property valuation which you are liable to pay for after you accept the initial offer. Valuation fees are usually set out on a scale with fees tied to the value of the property. They start in the low hundreds and can go up to thousands for very valuable properties.
You will need to pay the legal fees for work solicitors do in relation to the property transaction. This starts in the hundreds but your solicitor will be able to give you a quote.
An arrangement fee is the fee you pay your lender for arranging the mortgage in the first place. These fees tend to be 1-2% of the loan amount if the loan is under £1 million. This fee is often paid once you gain mortgage approval but in some circumstances the lender may ask for it earlier.
Mortgage broker fees are often around 1% of the mortgage value but it’s important to remember that they can get you a much more preferable rate, saving you more than their commission.
How Long Does it Take to Secure a Commercial Mortgage?
The length depends on the complexity of the property, your business and your circumstances. However, many commercial mortgage applications result in offers made within 4-6 weeks. Having a broker to advise you on mortgages appropriate for you can save you time during the application process.
Future-Proof Your Business With a Commercial Mortgage
When you run a business, your future depends on making smart financial decisions every step of the way. If you’re looking to invest and have a stable financial future, buying commercial property might be the best option for your business.
Weighing up the pros and cons of a commercial mortgage is important and should take into account the likelihood of expansion. Owning your property gives you more options than renting and if you buy a large property, you can potentially let spare areas if your lender agrees.
To get expert advice on securing the right commercial mortgage, get in touch with us today. We have access to the best deals for business owners and buy-to-let landlords so you can get an offer that serves your business goals.
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