Commercial mortgages, sometimes referred to as business mortgages, are mainly for business owners who are looking to buy property or land for commercial use.
It’s a familiar process for many businesses that have successfully grown, and who are setting up a new work space or looking to expand beyond their existing business property. It can often be the right course of action for business owners who are looking to avoid increasing rents, or maintenance and management fees.
The main difference between a commercial mortgage and a residential mortgage is that the value of the land or property is usually much larger. Also, because of the sheer variation of land and premises, commercial mortgages tend not to be pre-set products in the same way that residential mortgages are, although they do stick to the pan-European Mortgage Credit Directive, which covers both residential and commercial mortgages.
As a commercial mortgage is any loan secured on property which is not your residence, buy to let mortgages are a special type of commercial mortgage as well. If you’re planning on buying a property to rent out for extra income, you’ll need a commercial mortgage.
As businesses grow, they often start to run out of space. Whether it is because they have taken on more staff, are handling more sales, require more space for new equipment or simply need a bigger shop floor, there are many reasons for moving to new premises.
Commercial mortgages, also known as business mortgages, let business owners borrow money needed to buy property or land for their business. Similar to a residential mortgage, the money is borrowed from a high street bank or specialist lender and is repaid in monthly instalments, along with interest.
While commercial mortgages are most commonly used by business owners who want to own the premises where their business is based, commercial mortgages can also be used by investors who want to buy a property to lease to another business, or a residential property owner who wants to buy multiple properties and rent to tenants.
Commercial mortgage loans are similar to traditional mortgage loans; but instead of borrowing money to buy residential property, you secure any land or property for commercial purposes. Examples of commercial property are office buildings, industrial warehouses, apartment complexes, shopping centers, commercial building or land zones for commercial use.
You can also use commercial mortgage loans to develop existing or new commercial property. If you have existing commercial property, you can also use the funds from the loan to extend your current premises.
In this guide, we will walk you through the various types of commercial mortgage loans, application process, rates and terms, and alternatives.
How to get a commercial mortgage
Unlike residential mortgages, which are easy to find and research online, commercial mortgages tend to work on a case-by-case basis. To apply for a commercial mortgage, you can either apply directly to a lender or use a specialist commercial mortgage broker.
In considering a commercial mortgage application, a lender will carry out many similar checks to those applied in a residential mortgage, such as affordability and the financial health of the applicant. This likely involves a business credit check to see how the company manages its current debts and financial commitments as well as any outstanding issues.
The lender is also likely to look at whether the business is profitable and will therefore typically need at least two to three months of business bank account statements. Proof of identity and address, as well as any lease or tenancy agreements, is also required. You also might have to provide a business forecast to show you have a viable financial plan.
There are many different options available, depending on your lender. Finding a commercial mortgage can take a bit of time and detailed research, but you should find a lender that meets your particular needs. A mortgage broker can help at this stage.
Before you start your search, remember that you’ll need certain documents in order to apply successfully. Check that you have:
- Recent bank, liability and asset statements records
- Performance figures (both current and projected)
- The details of your partners and directors
- Tax returns (for a period of at least three years)
What are commercial mortgage terms?
Terms can vary. Some repayment plans have three-year terms, while others may offer a term of 25 years; the average is around 15 years.
Terms are often dictated by the size of and value of the property, or the available deposit you have, with many lenders offering commercial mortgages at a variable rate.
You’ll need to watch out for complex clauses or directives where there are greater risks to the borrower – if you have any doubts or you’re unsure of the contract wording, your mortgage broker will be able to help.
What are the benefits of using a commercial mortgage broker?
Applying for a mortgage can be complex, but using a specialist commercial mortgage broker could help you navigate the process and make it a little easier. They will ensure you have the correct information for the loan application, advise on what products are currently available and which are more suited to you and your business. They will also be able to give a view on how long lenders are taking to assess applications, which could be useful when it comes to securing the best property for your business.
What to consider before applying for a commercial mortgage
Before applying for a commercial mortgage you should make sure you consider whether you can afford to make the monthly repayments. Remember to factor in any existing loan repayments you have when working out what you can repay each month. If you are unable to make your monthly commitments, you risk damaging your credit rating and the lender could ultimately repossess the property if you are in default.
If you have a poor business credit rating then you could still be approved for a mortgage but you might be offered a higher interest rate than if you had a strong credit rating. Check your credit rating and see if you could improve your business credit rating before applying if possible.
If you are a new business without a strong credit or trading history then lenders might view you as more high-risk than an established business.
Business mortgages vs personal mortgages
The main difference between a business mortgage and a personal mortgage is that one is used to buy business property and the other is used to buy a home. Commercial mortgages also tend to be larger as the size or value of the property or land tends to be larger.
Although, like with residential mortgages, you can get a fixed or variable rate, business mortgages are usually taken out with the latter , meaning the rate could go up and down as the Bank of England base rate fluctuates.
Commercial mortgages usually come with higher interest rates as they are considered more high-risk to lenders. However, commercial mortgages usually have lower interest rates than standard business loans as the mortgage is secured against the property.
While it is possible to get a residential mortgage with a 5-10% deposit, commercial mortgage lenders usually want a larger one, typically between 20% and 40% of the property’s value.
The Commercial Mortgage Loan Application Process
Just like a traditional home loan, lenders determine pre-qualifying potential even before you fill out an application form. The pre-qualification process involves evaluating your financial history, income, and debts. Once you have passed pre-qualification, you move on to the next phase of the application process.
Traditional lenders will typically require financial statements, income tax returns, and banking statements from the last 3-5 years to determine business stability. Apart from the significant amount of financial paperwork involved, be prepared to show the lender your business plan that includes projected earnings. Your credit history will be evaluated along with your income and available collateral. At some point in the process, expect to pay for an appraisal of the property.
Once all the paperwork has been approved, your loan application is forwarded to a loan underwriter who will either approve or deny your application based on the information you provide.
Because commercial mortgage loans deal with enormous sums of money, banks and lenders can take 3 to 4 months to process a loan. This is because of all the documentation that needs to be evaluated and verified. Property appraisal also needs to take place.