When choosing a commercial mortgages there are questions you’ll need to ask yourself.
- Which lenders will approve and reject you?
- Are the rates you’re getting competitive?
- Are the terms you’re seeing the best fit for your company?
How Does a Commercial Mortgage Work?
A commercial mortgage is similar to a regular residential mortgage but is only available for businesses. There are a few reasons why a business might apply for a commercial mortgage:
- They want to purchase a new property.
- They want to raise their financing at a lower cost than taking out a business loan.
- They want to refinance for debts and consolidate their outgoings.
The great thing about a commercial mortgage is that you secure it against your property so there is no maximum value, compared to the typical £50,000 limit for loans. Commercial mortgages are usually set at 75% of the value of your assets.
The Basics of Business Mortgages
Understanding the basics of a business mortgage is key. There are two key differences to keep in mind:
- A commercial mortgage is considered ‘high-risk’ and thus has a higher interest rate.
- A commercial mortgage has a better interest rate than a business loan.
You can use any property intended for commercial use as the asset you put up as security.
What is the Application Process For Commercial Mortgages?
Every commercial mortgage loan is analysed on a case-by-case basis with the help of mortgage advisors. There is also a fairly involved application process, which means that you’ll need to provide any of the following documents and information:
- Trading info and financial accounts for your company.
- A property valuation.
- Statements, documents and tax returns which show evidence of turnover.
- Business plans – typically for at least 3 years.
- Cash flow projections and statements
- ID for any owners and directors in the company
- Balance sheets (for limited companies only), and liability statements
Things to Consider When Applying For a Commercial Mortgage
There are a few things to consider when applying for a commercial mortgage:
- A poor credit rating can impact your chances of getting the best rates – it won’t stop you applying for a mortgage, but can damage the likelihood of a good deal.
- Business mortgages are secured loans. If you don’t make the payments, you could lose your property.
- Commercial mortgages often require a large deposit, which can impact repayments.
- Businesses which have been operating for longer will have a better chance at a mortgage because they have evidence of successful trading.
Why Take Out a Commercial Mortgage?
A commercial mortgage can offer a lot of advantages. The interest payments are tax-deductible, your capital will increase with your property, and you can rent the property for income.
Furthermore, a commercial mortgage has a low interest rate compared to other loans. A fixed-rate loan is best, because it helps with managing cash flow. Commercial mortgages are also great for capital growth over time, as opposed to being liable for corporate gain taxes through property acquisition.
How Do Business Mortgage Rates Work?
There are a number of fees associated with a business mortgage. Some of the typical costs can include the following:
- Valuation fees are pretty straightforward and they are the cost of getting the valuation. This can be anywhere from £500, but it depends on the company you work with.
- You’ll need to pay legal fees for both your company and the lender. This can be around £500 for each party involved.
- A broker can charge a fee for their services, and this can sometimes be 1% of the loan you get.
- You’ll pay arrangement fees for the mortgage after you’ve got it – these can be 1-2% of the loan value for any loan valued up to £1m.
What Are the Lending Criteria For a Business Mortgage?
Each lender will have a different criteria for mortgages – you’ll need to submit to their checks. They’ll look at things like your projected income, debts, assets, deposit requirements and other things. If you can’t get a commercial mortgage, you have other options like a bridging loan, short-term loan or a business loan.
Choosing a Commercial Mortgage
Finally, it is worth noting there are two types of commercial mortgages. You’ve got an owner-occupier mortgage and a commercial investment option.
The owner-occupier mortgage means buying property through a loan to use for business. The commercial investment mortgage is to purchase property for rental properties. Picking the right loan will guarantee you’re not rejected outright.
