What You Need to Know
- A Commercial Mortgage is a loan taken out by a business on a property other than that which you live in.
- They are often used to purchase shops, offices, and industrial units where business are based, but can also be used for investment properties as well.
- The Commercial Mortgage market is less regulated than the residential mortgage market and the application process is much tougher. Interest Rates can be much higher as well.
- There are a variety of different Commercial Mortgages available including Owner-occupied mortgages, investment mortgages, and HMO Mortgages.
- It is a complicated marketplace and it is advisable to do plenty of research before making the decision to take out a commercial mortgage.
- When making an application it is also worth using a Commercial Mortgage broker as they can secure the best rates available, as well as advise on what is the right product for you.
What is a Commercial Mortgage?
A Commercial Mortgage is loan taken out against a property which is not where you live. They are essentially business loans that operate in the same way as a residential mortgage, allowing people to buy properties to be used as commercial premises.
Commercial mortgages can also be used to help those in business purchase investment property, or to secure further funding against existing assets.
A commercial mortgage can run for anything from 10 years to 25 years, and it is usually possible to borrow up to 80% of the value of the property being mortgaged. Because most commercial mortgages are taken out in the name of a company rather than an individual, the process of getting approved for one is considerably more complicated and long-winded than a regular mortgage. This is because lenders have to confirm the creditworthiness of a business, which is much harder than that of an individual.
A decision about creditworthiness will be taken based on past performance, the businesses current financial position, and its future business plans. Companies will often be required to submit a highly detailed and fully costed business plan which demonstrates how they intend to meet their repayment requirements. The building itself will also have to be professionally valued.
If the lender believes the business plan is sound, the mortgage rate offered is likely to be more favorable. If they are not so keen, the business will be deemed a higher risk, and the mortgage rate is therefore likely to be higher too.
Most businesses require a property of one kind or another to be able to function, and along with rent, a commercial mortgage is the other way to obtain one. But there are advantages and disadvantages to taking out a commercial mortgage, and to renting a commercial premises.
The Pros and Cons of Commercial Mortgages
- Having a commercial mortgage removes the risk of your landlord increasing your rent, which has jeopardised the future of many business across the UK in recent times.
- It is possible to obtain fixed rate commercial mortgages over relatively long periods, giving security on one of the biggest aspects of your outgoings.
- Tax on the interest of a commercial mortgage can be reclaimed.
- Should the value of your property increase, you will be increasing your businesses assets.
- There may be the chance to sublet some of the premises to gain an additional rental income stream for your business.
- Variable rate commercial mortgages leave companies susceptible to interest rate rises pushing their mortgage payments up.
- You will need to be able to find a sizable deposit to secure a commercial mortgage. 20% is usually the minimum deposit expected.
- The value of properties can go down as well as up, and if yours drops, your business could be sucked into a situation of negative equity.
- You will be responsible for all the maintenance costs of your building.
- You are tied to your building and its location, and moving your business will be hard.
The Pros and Cons of Commercial Rent
- You will not be responsible for any of the maintenance costs associated with the building as these will be the responsibility of your landlord.
- You will not have to tie a large chunk of money up in a property in a deposit, giving your business more liquidity to invest in other areas.
- You are not running the risk of losing money if the value of your building goes down.
- It is easy to relocate your business to another site as and when you want to.
- There is a risk that your landlord could increase your rent considerably, possibly to a level that you are unable to afford, forcing you to move, and potentially even jeopardising the future of your business.
- You will be paying out a considerable amount of money in rent, which is not being invested in an asset and is effectively lost.
- You do not have an asset in terms of a property, and cannot make any extra profits as and when the value of that property goes up.
What types of Commercial Mortgages are available?
The choice about whether taking out a commercial mortgage is the right option for your business will be based on these factors, and the financial situation you find yourself. If you do decide that a Commercial Mortgage is the right option for you, there are a variety of different types of commercial mortgage available:
- Owner-occupied Commercial Mortgages: The most common form of commercial mortgage is on the property in which the business is located. They can be used for such properties as shops, other retail spaces, offices, and industrial units. They work in much the same way as an owner-occupied residential mortgage does, although with the stricter application requirements as detailed above.
- Investment Commercial Mortgages: Investor Commercial Mortgages are used by individuals or companies, to buy a property before renting it out for a profit. They are used for buying retail premises, offices, industrial sites, and also single-occupancy residential properties.
- HMO (Homes in Multiple Occupation) Mortgages: HMO Mortgages are used to purchase buy-to-let properties where there are more than residential units within the building. They are used for properties such as blocks of flats, converted houses, and student accommodation blocks. HMO mortgages often carry higher interest rates as there is perceived to be a greater risk with the rental income in a multi-occupation premises. If you are considering taking out an HMO Mortgage, it is advisable to seek the advice of an expert HMO Mortgage Broker to find the best deal.
Using a Commercial Mortgage Broker
As well as HMO Mortgages, there is a lot to be said for taking the advice of a Commercial Mortgage Broker before choosing the right deal for you.
The Commercial Mortgage market is significantly more complicated and less transparent that the residential mortgage market. It is also not so heavily regulated, so going into it unprepared can be a risky decision.
However there are plenty of Commercial Mortgage Brokers around who can help you to navigate your way through the systems complexities, and find the best available deal for you.
They will have direct connections with most of the major commercial mortgage lenders allowing them to negotiate on your behalf to secure more favourable rates. They are also usually allowed to process all of the application on your behalf, taking away the pressure of having to deal with a large amount of complex paperwork, and avoid making any mistakes in your application.
They can give you all the information that you need about the different mortgages out there, and even suggest other investment products that might be more suited to your needs.
Also if you are looking to make multiple application, they can help to secure you discounts.
Before you contact a Commercial Mortgage Broker, it is advisable to do some research yourself to ensure that your business is really in a position to take out a commercial mortgage. One good way to begin doing this, is by using a commercial mortgage calculator to see if the sums add up for you. Most lenders offer one on their website, or a quick google search will turn up a variety of different options.
When calculating what you can afford, be sure to be realistic in the amount that your business will be able to afford to repay each month. There is little point making an application based on a repayment figure that is out of reach for you.
It is also worth checking out what the market is offering at the moment. Our site has compiled a list of the top Commercial Mortgage lenders around, which is the ideal place to begin our research
- Take a look at some of our other Mortgage Guides.
- Read our top tips for getting accepted for a mortgage.
- Check out our guide to the UKs top mortgage lenders and brokers.