In This Article
What are commercial mortgages?
Commercial mortgages are loans that allows a business to purchase property. A commercial mortgage may also be called a business mortgage and are often used by owners of small businesses to purchase office buildings or retail stores. They can also be used to purchase equipment like delivery vans and kitchen equipment.
Commercial mortgages are usually taken out by the business owner or a partner in the business, but they can also be taken out by investors who want to invest in the company and get a return on their investment through interest payments on the loan. Not all lenders would do this.
These mortgages are different from unsecured business loans because they have lower interest rates, longer repayment terms (up to 25 years), and higher amounts borrowed than standard business loans. They are also secured by some security (such as commercial property) so that if you default on your mortgage payments, the lender can repossess that security and sell it for money toward paying off the loan balance.
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How do commercial mortgages work?
Commercial mortgages are different from residential mortgages because they’re usually bigger (if buying a large building) and require more money up front. They also have different repayment terms—some commercial mortgages may have shorter terms than a residential mortgage would have, for example.
The main advantage of a commercial mortgage is that you can borrow money from the bank to buy the building or land you need for your business. The bank will lend you the money in exchange for future payments from your business—usually over a period of 5-20 years.
When you take out a commercial mortgage, you’ll have to pay interest on it every month until it’s paid off. In addition to paying interest every month, you’ll also have to make regular payments toward the principal balance of your mortgage.
Are there different types of commercial mortgages?
There are two main types of commercial mortgages: those for people who will live in the premises and run their business from there, and those for people who will let out the premises as a business.
Commercial mortgages are available for a variety of property types, including:
- leisure properties (restaurants, pubs, clubs, hotels, gyms, casinos, etc.)
- Semi-Commercial Properties (offices with flats above, shops with flats above, etc.)
- retail commercial investment properties (retail units, retail parks, etc.)
- office properties (office blocks, etc.)
- industrial properties (factories, warehouses, storage facilities, etc.)
- care homes (nursing homes, hospices, etc.)
- professional properties (doctor’s surgeries, private schools, vets, etc.)
- and agricultural properties (farms, farm buildings, farmland, etc.).
How to get a commercial mortgage?
If you want to a commercial mortgage, it is wise to speak to a commercial mortgage broker. Commercial mortgage brokers work with commercial lenders to find one that will be best for your needs. To determine what kind of lender you need, complete an asset and liability form and submit it to the broker.
The broker will forward the form to the lender, who will then decide whether or not you are eligible for a mortgage.
In order for a lender to approve your mortgage application, he or she will need to know about your income, expenses, and financial history over several years.
Once this information has been gathered and reviewed by an underwriter, you can proceed with other parts of the buying process such as obtaining appraisals on the property and any other properties used as collateral.
After that, the solicitors do their due diligence before signing off on the deal.
What documents do I need to support my commercial mortgage application?
When applying for a mortgage to buy or extend your business premises, remember that you may need to provide the following documents:
- Bank statements
- Trading figures for the last three years
- Lease agreements
- A business plan
- Proof of identity and address.
- If you’re setting up a limited company business mortgage application, please also include debentures and personal guarantees from the company directors.
Your mortgage adviser would confirm what you need to provide.
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What are the costs and fees?
When you take out a commercial mortgage, it’s important to keep in mind other costs. These include arrangement fees, valuation fees, and broker’s fees. Arrangement fees are due at the completion of the loan and charged as a percentage of the loan amount (commonly 1-2% for loans up to £1 million).
Valuation fees for commercial properties are usually higher than for residential properties, and exact amounts will be based on the property. Broker’s fees are usually around 1 percent of the loan amount but this can vary. When you apply for a loan, the lender will assess your ability to repay the money.
How do lenders assess a commercial mortgage?
Lenders will assess your commercial mortgage based on the debt coverage ratio (DCR) / Net income or EBITDA.
Debt coverage ratio (DCR) is a ratio that compares net income to debt service. The higher the DCR, the better.
Net income is calculated by subtracting all expenses from revenue and then dividing by interest expense. Interest expense is typically calculated as a percentage of loan principal, though it can also be calculated as a flat rate.
The reason that lenders care about net income is because they want to make sure that you can afford to pay them back. If your business has low net income, it may not be able to afford its loan payments.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a measure of how much money the company makes before all its expenses have been paid. The higher your EBITDA, the more likely you will be able to borrow money at a reasonable rate.
How much deposit is required?
Commercial mortgages typically require anywhere between 25 and 40 percent of the mortgage required upfront. The amount of your deposit depends on the type of property you’re buying, as well as the amount of leverage you’re taking on.
For example, if you’re buying a small business with no debt and hoping to use it as collateral for an investment loan, your deposit may only be around 25%. However, if you’re buying a large office building with significant debt on top of that investment loan—as is often the case—then your deposit will likely be closer to 40%.
What if my business has bad credit?
Yes, there are lenders that will consider your application for a commercial mortgage, whether you have bad credit on your file or it is attached to the business you want to finance.
Commercial mortgages tend to be larger than residential mortgages and there are Specialist Lenders who are more flexible with their financing options. A mortgage adviser may be able to introduce you to such a lender.
You can look at your business credit file with websites such as Experian, Equifax and Check my file which offers a free trial.
How long does the application process take for a commercial mortgage?
The application process for a commercial mortgage can take anywhere from a few days to a few months, depending on the type of property you’re buying and the lender you choose. In general the average turnaround time for a commercial mortgage loan is 8 to 10 weeks.
It’s important to find a lender who specialises in commercial lending, as they’ll have specific experience and connections that can help you get your loan.
The first step is going through your financials and determining how much money you need for your project. Once you’ve figured out how much money you’ll need, it’s time to speak to a mortgage adviser.
Can I get a commercial mortgage if I’m a first-time borrower?
Yes, you can sometimes get a commercial mortgage if you’re a first-time borrower.
Mortgage advisers work with lenders who are flexible, so even if this is your first time borrowing, there’s no reason to think that you won’t be able to find a lender that will work with you.
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Can I get a business mortgage if I’m self-employed?
Yes, you can get a business mortgage if you’re self-employed.
If you’re self-employed and looking to buy a business property, the process can be a little more complicated than it is for someone who’s employed. But don’t worry a mortgage adviser can help you.
First, it’s important to talk about how much money you want to borrow and what type of property you’re looking to buy. Then they’ll be able to help you figure out how much equity in your business is required in order to qualify for financing and what kind of income documentation will be required as part of the application process.
Can I purchase a commercial property with a SIPP?
Yes, you can purchase a commercial property with a SIPP.
If you want to purchase a commercial property with your SIPP, you’ll need to first set up an account with an authorised financial adviser (usually a bank or building society). Then, you can arrange to buy the property through this account.
The financial adviser will help you make sure that the property is suitable for your SIPP and help you manage any risks involved in buying it. The adviser will also handle any tax issues related to the purchase of the property.
If you want to sell or rent out the property after buying it through your SIPP, then this should be done via your personal account rather than through your SIPP.
Commercial mortgage insurance
Commercial mortgage insurance is a policy that protects you from loss of your investment if the tenant defaults on their lease. In most cases, this is not necessary.
If you have a long-term lease with a good tenant and you’re confident they will make their payments, then you probably don’t need to take out insurance. This is because if the tenant defaults on the lease, you’ll have time to find a replacement tenant and still recover your investment.
However, if you are taking out an adjustable-rate mortgage or a short-term loan with the option to convert to a long-term rental agreement, then it’s more likely that the tenant will default on their payment schedule. In these cases, commercial mortgage insurance could be beneficial so that if there is a default on payments, your lender will be able to cover some or all of the losses associated with this event.
Can I live in a commercial property?
In some cases you can live in a commercial property with a commercial mortgage (depending on terms) with some lenders/ properties. You’ll just need to make sure that the mortgage lender and local authority is aware of this fact and gives permission.
Conclusion
Commercial mortgages are used for a variety of purposes including purchasing commercial property, refinancing commercial property, short-term financing and long term financing. Since there are many companies offering commercial mortgages, it is important to find the best company for you.
Due to the complexity of the mortgage process, speaking to a mortgage adviser can help you better understand your situation and the steps that are needed to finalise your commercial mortgage.
They are experienced, which can boost your chances of being approved.
