How to Get a Commercial Mortgage
How to Get a Commercial Mortgage
Securing a commercial mortgage is a significant step for businesses looking to purchase or refinance property for operational use or investment purposes.
This post provides a comprehensive overview of the process, eligibility criteria, and key considerations to help you navigate obtaining a commercial mortgage.
What Is a Commercial Mortgage?
A commercial mortgage is a loan secured against a property not intended for residential use. Businesses utilise these mortgages to:
- Purchase property: Acquiring premises for business operations.
- Refinance existing property: Releasing equity from owned commercial property.
- Invest in property: Buying property to lease to other businesses.
More details of a commercial mortgage can be found in this good ar
Types of Commercial Mortgages
- Owner-Occupied Mortgages: For businesses purchasing property to use as their trading premises.
- Commercial Investment Mortgages: For investors buying property to rent out to other businesses.
- Semi-Commercial Mortgages: For properties with both commercial and residential elements, such as a shop with a flat above.
Eligibility Criteria
Lenders assess various factors to determine eligibility for a commercial mortgage:
- Deposit: Typically, a deposit of 25% of the property’s value is required.
- Credit History: A strong personal and business credit history enhances approval prospects but isn’t 100% essential.
- Business Financials: Lenders review trading history and financial statements. Having your accounts filed on time and year to date figures really helps.
- Experience: Experience in property investment or the specific industry can be advantageous. It can be overcome, lenders understand that if you can run a business you can probably manage a property.
While meeting these criteria improves the likelihood of securing a mortgage, options are still available for those who don’t fully meet them. This is at potentially higher interest rates or with a smaller pool of lenders to choose from.
Application Process
Don’t be put off. The application process for a commercial mortgage can be simpler than a mortgage for your own home.
- Preparation:
- Financial Documentation: Gather business accounts, bank statements, tax returns, and year to date figures.
- Business Plan: Not War & Peace! A basic outline of what you want to do is enough. This can be one short paragraph.
- Seek Professional Advice:
- Mortgage Brokers: Can provide access to a range of lenders and assist in finding the most suitable mortgage product. Many commercial lenders will only work via good intermediaries such as ourselves.
- Submit Application:
- Complete the lender’s application and submit all required documentation. If this can be done in one go it shows you are organised and on the ball, a real plus when borrowing.
- Valuation and Legal Processes:
- The lender will arrange a property valuation.
- The lender will generally ask for an Asbestos report, EPC and Fire Risk Assessment, ask the vendor for all these.
- Legal due diligence will be conducted, including checks on the property’s title and any potential legal issues.
- Offer and Acceptance:
- If approved, the lender will issue a mortgage offer outlining the terms.
- Review the offer carefully before acceptance and always take independent legal advice if unsure of anything.
Key Considerations
- Interest Rates: Commercial mortgage rates are typically higher than residential rates and can be fixed or variable. Always measure the cost of a commercial mortgage against rental or lease costs, not your home mortgage.
- Loan Term: Terms usually range from 3 to 25 years.
- Fees: Lenders will typically charge an arrangement fee. You will need to budget for valuation fees, legal costs, and potential other surveys or reports.
- Repayment Structure: Options include capital and interest repayments or interest-only arrangements. You can work out your costs here.
- Who is Buying: Are you going to buy in your own company name, set up a new limited company or another way. Ask your accountant what works best. Lenders are generally OK whichever way, just make sure it is the best way for you.
Benefits of a Commercial Mortgage
- Equity Growth: Potential for property value appreciation over time.
- Cost Savings: Owning property can be more cost-effective than leasing in the long term.
- Income Generation: Opportunity to earn rental income from leasing part or all of the property. Commercial property yields can exceed those of residential property.
- Security: Owning your own commercial property removes the risk of increased lease costs or non-renewal at the end of a lease term.
Potential Drawbacks
- Upfront Costs: Significant deposit and associated fees required.
- Financial Risk: Responsibility for mortgage repayments regardless of business performance.
- Property Maintenance: Ongoing costs for upkeep and potential renovations.
Conclusion
Obtaining a commercial mortgage involves careful planning, thorough preparation, and a clear understanding of your business’s financial position.
By assessing your needs, researching the market, and seeking professional advice, you can secure a mortgage that aligns with your business objectives and allows for financial growth.
For more detailed information and guidance then get in touch. We would be pleased to help.
Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.
