A commercial mortgage is any loan secured on property which is not your residence. Also known as ‘business mortgages’, they’re aimed at business owners who wish to buy property or land for commercial purposes.
Commercial mortgages and business mortgages work similarly to a residential mortgage, in that the lender advances you money to purchase a property or business. The difference is that with a business mortgage, you’re borrowing to buy a property or business for commercial purposes rather than a house or flat to live in or rent out.
Just like residential mortgages, you’ll pay back your loan over time and will have to keep up with the mortgage repayments to avoid defaulting on the loan.
Commercial Mortgages or Business Mortgages can be divided into two categories:
Owner-occupied commercial mortgages – These are used to buy property that will be used as trading premises for your business.
Commercial investment mortgages – These are used for property you’re planning to let out. The property can be commercial, residential, or a mix of both (semi-commercial).
Commercial mortgages generally take over where business loans finish. Business loans up to c.£250,000 can be unsecured, but for larger amounts, lenders typically need security in order to reduce the risk to themselves.
A business mortgage usually lasts from five to 25 years, and you can typically find a 70-80% mortgage. This is a measure of loan-to-value (LTV) ratio to see how much you’re borrowing in relation to how much the property is worth or what you’re paying for it.
If it’s an investment then the amount you can borrow will be determined by the rental income generated by the investment, but this is unlikely to exceed 70% of the purchase price.
If you are buying a business which includes goodwill, stock, etc, then the amount available may be further reduced. Contact us today to discuss what options are available to you and your business.
A business mortgage or commercial mortgage differs from a regular residential mortgage and other business loan facilities in the following ways:
Most commercial mortgages are paid at a variable rate. Typically, a rate will be quoted as X% over Bank of England Base Rate (or any other reference rate a lender may use), and this in residential terms would be called a tracker mortgage. Fixed rate mortgages are available but tend to be limited to loan facilities of £1,000,000+.
Unlike most personal loans, the rates charged for commercial mortgages and business loans are not determined from the offset. Lenders usually have a risk profile that they work to, so if your loan falls outside their risk profile it will be refused.
This is where using a knowledgeable and experienced broker is key, as they will be able to de-risk your loan application, making it as attractive as possible to lenders to obtain you the most competitive terms.
For you to qualify for a commercial mortgage, you’ll need to pass the lender’s eligibility checks which usually include:
The application process will vary from lender to lender. Business Finance Expert will help you navigate the process from start to finish. But generally speaking, here’s what to expect to provide:
Financial accounts (last 3 years), management accounts, tax returns, leases and payslips are the most common forms of documentation to prove your or the business’ income.
CVs or a brief bio for each shareholder, director, senior member of staff are great ways to demonstrate experience to a lender. Also, a copy of your personal credit report can be a great way to de-risk an application for finance.
Business and personal bank statements are required to provide evidence that the borrowers operate their accounts properly and professionally.
A key part of the application process as this confirms to a lender the quality and value of the security they are taking against the loan.
Regulatory reports, occupancy reports, resident or customer lists and sales details/particulars all provide important information about the business/property and its performance.
If you’ve got big plans for the business you are buying, share what your plans are and link them into financial forecasts. This way a lender will know you are serious and committed to improving the business and its financial performance.