Commercial mortgages

What is a commercial mortgage?

Similar to a basic first charge mortgage, this is a loan secured against a property. But Commercial Mortgages are secured against commercial premises such as shops, factories, or offices etc and cannot be secured against a residential property.

These are used to buy business premises or to buy a business outright. The lending criteria are based on your business’s ability to pay the mortgage repayments.

With a basic first charge mortgage, lenders look at someone’s personal income to see if they can afford the mortgage payments. For Commercial Mortgages, lenders instead look at the business’s income and assess the business’s ability to pay.

This means lenders will check your business’s past accounts, current performance and predicted future income.

When applying, you might be asked to supply a business plan along with detailed accounts.

If you’re starting a new business, lenders might need a large deposit. Commercial Mortgage deposits are usually around 50%, compared to the 10-20% expected when applying for a Basic Mortgage.

For existing businesses the Loan to Value (LTV) rate can be higher, but varies depending on the business type.

The difference between a business loan and Commercial Mortgage is that a business loan is not secured against your property. As with basic mortgages, any Commercial Mortgage secured against a property means the property could be at risk if repayments are not made.

The high levels of administration associated with a commercial mortgage can also mean than many lenders have a minimum loan of £75,000.

When would you use it?

Used in a variety of commercial situations to either start a new business or help a current one to expand through the purchase of property or land.

They can also be used to move your business from rented accommodation to your own premises.

This can help your business to manage its future nuances more accurately as it won’t be affected by sudden rent rises. While a business loan can be used to start a business, if you need to borrow more than £75,000 a Commercial Mortgage could be an option.

The fine details

• Interest rates based on your business’s ability to pay off the mortgage
• Tends to be slightly higher than basic first charge mortgage interest rates
• Interest repayments on a commercial mortgage are tax-deductible
• Some additional costs associated with this type of mortgage like valuation fees or early repayment fees
• Normally only available on leaseholder properties with leases longer than 70 years
• Usually last between three and 25 years though exceptions can be made. For shorter periods a Bridging Loan can be used
• For an owner-occupied property, you can usually borrow 70-75% of the value
• For investment properties it drops to around 65% but is usually determined by how much rent you can generate
• When buying a business, aspects like existing stock, current contracts and the reputation will also be taken into account
• Business start-ups considered

Benefits for small businesses and semi-professionals...

• Designed with commercial developments in mind
• Strong business can lead to better deals
• Usually more favourable interest rates than business loan
• With additional security, you can borrow 100% of the property’s value.