Commercial mortgages allow businesses or individuals to buy business premises or other non-residential property using a loan secured on that property. As well as warehouses, factories and retail stores, this includes residential developments that contain multiple housing units and communal areas.
Commercial mortgages may be either investment mortgages, where the property is let out to a business tenant, or owner-occupier, where the borrower occupies the property. Loan durations vary more in commercial mortgages than in residential, and some commercial mortgages may be structured with payoff periods as short as a few years.
Maximum loan-to-value (LTV) ratios tend to be slightly lower compared to residential mortgages, with the maximum loan often being 70-75% of the property value for an investment mortgage, and potentially up to 80% for owner-occupier. Similar to residential borrowing, lower interest rates are generally available at LTV ratios of 60-65%. It is generally not possible to receive the very high loan-to-value ratios above 80% that are sometimes seen in residential mortgages. Commercial mortgages are overwhelmingly repayment mortgages, where the loan is paid down over the term, although some lenders offer interest-only options.
Costs and fees for commercial mortgages include arrangement fees, valuation fees and legal fees. Valuation and legal fees are typically a fixed amount, while arrangement fees are typically 1-2% of the value of the loan. Additionally, a broker may also charge a fee for their service. Because commercial mortgages are treated as normal business expenses, they are deductible against profits for Corporation Tax purposes.
Commercial mortgages are usually variable rate, quoted as a spread above the bank rate. As for residential tracker mortgages, the size of the spread will depend on the lender’s perception of the risk on the loan, with smaller, younger, less profitable companies or those with unstable cash flows paying more. Commercial mortgages in general are perceived as higher risk than residential, as the buyer of a business premises does not risk losing their home if they default. Commercial mortgages do tend to be offered at better interest rates than standard business loans, however, as the borrowing is secured on the property.
Applying for a commercial mortgage is similar to applying to a residential mortgage, although if the loan is in the name of a business, it is the business’s cash flows that will be scrutinised, not those of the owner. The lender will want to see evidence of a sustainable debt position and cash flows sufficient to service the loan for the past several years, as well as reasonable levels of cash reserves to cover the deposit and account for any unanticipated events. Lenders may also require a business plan illustrating how the cash flow of the property will be used to pay back the loan.
Buy-to-let mortgages are classified as residential mortgages, but have certain commercial aspects and represent in some respects a halfway house, being mainly intended for investment, having similar loan-to-value restrictions, and requiring the ability to cover the mortgage payments using rental income.
A commercial mortgage broker can help you understand your options, find a competitively priced loan that meets your requirements, and submit an application that is attractive and compelling to lenders. You can find the best-rated commercial mortgage advisers in our directory.