Commercial mortgages allow businesses to obtain equity to buy property, invest in property, refurbish their business premises, or make large purchases such as vehicles or machinery.
Compared to a residential mortgage, a commercial mortgage is a loan secured against a business premises rather than a residence. Commercial mortgages allow business to borrow over an extended time, anywhere between 1 and 25 years. Deposits on commercial mortgages are higher than residential mortgages, with most lenders looking for deposits of 25% to 50%. The maximum loan-to-value ratio (LTV) most lenders will accept on commercial mortgages is 75%. This means you can borrow a maximum of 75% of the value of your business property
The amount you can borrow is dependent on several factors. For example, if you are investing in a rental property, the amount you can borrow will vary depending on the projected rental income of the property.
Commercial mortgages usually do not come with fixed interest rates. There tends to be higher interest rates on commercial mortgages as they are higher risk for lenders than residential mortgages. However, the interest rates on commercial mortgages are often better than the rates on business loans.
Why do people need commercial mortgages?
A commercial mortgage allows business owners to improve their business by using the equity to do one of the following:
- Buy property
- Invest in their business
- Develop their existing business property
- Purchase property to lease to another business and generate rental income
- Buy machinery, equipment, or vehicles for the business
How to apply for a commercial mortgage
Applying for a commercial mortgage is not dissimilar from the process for applying for a residential mortgage. Hiring a broker is advisable as they can secure you the right deal with the most suitable lender. Mortgage brokers have access to the whole market, so they can compare the available deals and get you value for money.
You will first complete an Asset and Liability form, followed by a commercial mortgage application form. You’ll be asked to share information about your business, such as expenditure and profit over the last few years, any business plans and projected profit for the future. The business premises will also be valued.
If your mortgage application is approved, the bank will send you a mortgage offer.
You will be required to send documentation including recent bank statements, business trading figures for recent years, ID and proof of address and any documents related to your business premises such as lease agreements. Some lenders will also request future projections for your business and business plans. This allows lenders to be more confident that you will be able to pay off the commercial mortgage.
If you fail to pay the commercial mortgage, the loan is secured against your business premises. This means there is a risk you could lose ownership of the property if you don’t pay back the loan.
Types of commercial mortgages
There are two types of commercial mortgages. It is useful to understand what both types are so you can understand which product is right for you and your business.
The first is owner-occupied mortgages. This refers to mortgages that are used to purchase property related to the business.
The second type is commercial investment mortgages. These are used for property you wish to rent out to tenants.
The Financial Conduct Authority does not regulate commercial finance. Your Space Mortgages Bristol, don’t provide advice on Commercial mortgages, but work with a number of firms that will be able to help you and organise and introduction.
