If you are looking to purchase a commercial property or develop commercial premises and need to borrow money to do so then you will require specialist commercial property finance. By far the most popular way of doing this is with a commercial mortgage.
What is a commercial property?
A commercial property could be premises that you run your business from such as a shop in your local high street, an industrial unit on a trading estate, a country house hotel, an office to run your solicitor’s practice from or an investment property that you rent out. The later is normally funded with a buy-to-let mortgage that we discuss in detail elsewhere on our website.
What is a commercial mortgage?
A commercial mortgage is a secured loan that is often used to help fund the purchase of a commercial property in a similar way to how a normal mortgage is used to help buy your home.
It can also be used for other things such as buying plant and machinery, buying an established business or funding the building of new commercial premises.
Who can take out a commercial mortgage?
Commercial mortgages are available to sole traders, partnerships or limited companies.
Who offers commercial mortgages?
Such mortgages tend to be available from high street banks and building societies as well as a number of other financial institutions.
Because there are so many companies offering commercial mortgages a great way of hopefully obtaining the best deal is to contact a commercial mortgage broker who has access to the whole of market.
How are potential borrowers assessed?
Each commercial mortgage application is considered on an individual basis. For instance, you may be required to provide 3 years audited accounts, up to date management accounts, cash flow forecast, several months’ bank statements if you are applying to a different bank with which you have your business current account and credit reference searches may be carried out.
How much can you borrow?
The minimum advance would normally be for £25,000. There is no maximum amount so commercial mortgages for millions of pounds are quite common.
Will you need to put down a deposit?
Yes, you will be expected to pay a deposit usually calculated as a percentage of the lower of the purchase price or valuation of the commercial property. The maximum advance can sometimes be up to 80% of the purchase price/valuation of the commercial property.
The level of risk has a bearing on the amount of the deposit you will need to pay. The larger the deposit you are able to find can prove beneficial as it could mean you pay a lower rate of interest as the risk to the lender is reduced.
Over what term can you borrow the money?
The term is normally from 2 to 30 years. This means the lender will tailor a package for you that is affordable and proportionate to what the funds are required for.
How do you pay the commercial loan back?
Normally, you will make monthly repayments to include capital and interest but other options may sometimes be available such as just covering the interest for a period of time.
What sorts of interest rates are available?
Lenders usually offer either fixed or variable rates of interest for their commercial mortgages enabling you to make the decision as to which you consider most suitable having taken into account a number of factors. For instance, if you feel that the long-term prospects for interest rates are that they are likely to rise then you may prefer the comfort of a fixed rate.
The interest rate is often linked to either the Bank of England’s base rate or to Libor.
The interest rate will be decided upon by the lender based on their perceived risk.
What security will the lender require?
Normally, the lender will require as a minimum a first legal mortgage over the commercial premises that you are purchasing. They may also ask for a mortgage debenture and/or personal guarantees from the directors.
Is it possible to get a commercial mortgage on a leasehold property?
Yes, depending upon the term remaining on the lease.
What is a semi-commercial mortgage?
It is a mortgage on a semi-commercial freehold property that tends to be a shop or office on the ground floor with residential accommodation such as a flat on the floor(s) above. The whole of the advance is treated as a commercial mortgage.
Are there any fees to pay?
Depending on the lender, there may be a fee payable upon application known as a commitment fee to cover the work involved in assessing your application should you decide not to proceed with the application. An arrangement fee is usually payable to the lender for setting up the commercial mortgage. Security fees and a valuation fee are payable. The broker may also charge a fee.
We hope that you have found our Commercial Property Finance Buyers Guide informative and look forward to being of assistance in your application for finance to fund the purchase of your commercial property.