Guide to Commercial Mortgages
If you run a business, buying the property in which you operate can make good financial sense. Apart from the obvious examples such as pubs, hotels and B&Bs, where the business is part and parcel of the building, buying property with a commercial mortgage is worth considering.
The advantages of buying are that you aren’t exposed to any hefty rent increases, you might be able to sub-let space to another company (although you will almost certainly have to clear this with your lender) and any appreciation in property values is your gain. You will also have the opportunity to build extensions and make conversions to your premises.
The disadvantages are that buying makes it more complicated to relocate your business (and possibly longer), you’re exposed to interest rate rises, and you’ll need to come up with a substantial deposit – money that could be used to improve your business.
If you have ever taken out a mortgage to buy a house, it might come as a shock to discover that the providers of commercial mortgage are not falling over themselves to lend to you.
Many high street banks don’t offer commercial mortgages, and you may need a specialist lender. A broker can cut your legwork and the lender often pays the broker’s commission costs.
Terms of commercial mortgages vary depending on your business and the location in which you want to buy. This is a complex area, and you should seek advice from a solicitor.
Many small business people wanting to buy a pub, hotel or similar get caught in the trap where the amount of money a lender will offer is based largely on the trading performance of the business they are buying, rather than their former or existing earnings.
If that business is under-performing and property values are high, it can be hard to raise the money needed, even if you are sure that you can shake things up and boost the profits dramatically when you take over.
If borrowers do find a lender, they can expect to pay an interest rate well above the current base rate.
Commercial mortgages differ from conventional loans in that you often have to have a large cash deposit. Many lenders will lend only up to 75% to 80% of the property value.
If your business is buying commercial property to rent out, lenders will want to be assured that the rent covers the mortgage by a certain percentage, such as 130%. For example, if you want to buy an office block, the lender will want to see that the rental income is 30% more than the cost of the mortgage.
Commercial loans tend to cost between 1.75% and 3% over a bank's base rate, and tend to be variable (the interest rate rises and falls with the bank’s base rate).
Loans are almost always issued on repayment terms, but over 15 or 20 years rather than the standard 25 years on residential loans.
Fees tend to be higher than for conventional mortgages. Arrangement and processing fees typically cost between 0.5% and 1.5% of the loan. Valuation fees will be higher if the lender insists on a full structural survey of the building, and legal fees can be higher because of the complexity of documents on many commercial properties.
Further information
Check out our commercial mortgage listings where you will find brokers, banks and lenders, which deal in commercial mortgages.
