We’re all familiar with residential mortgages used by property investors and how they generally work. But commercial mortgages are a very different ball game! As any mortgage book will explain, residential and commercial mortgages pose different risks to mortgage providers. From this, the process for mortgage application and the T&Cs of commercial mortgages vary accordingly.
Commercial mortgages can be a fantastic way for companies to expand their business finance options, for example:
- Raising capital through remortgaging a premise.
- Expanding their portfolio and purchasing more rental sites.
- Freeing up cash flow by reducing their initial outlay.
In this guide, the Revolution Brokers team summarises all the critical information about how a commercial mortgage works, what you can use the borrowing for, and the benefits available.
Commercial mortgages explained
Just like a regular home mortgage, a commercial mortgage is used to purchase any property or land as part of a business.
That might be as a trading premise, an investment, or a rental property – or you could be purchasing land to build on or use for storage, parking, etc.
Likewise, you can also use a commercial mortgage to refinance.
If you own a property outright or are intending to pay for a new trading site in full, a commercial mortgage can release capital or significantly reduce the impact on your cash flow.
Most commercial mortgages run for the typical 25-year loan term, although you can find loans with longer or much shorter repayment periods.
Usually, you’ll need around a 30% deposit, with commercial mortgages available up to 70% LTV. However, that’s not set in stone – a lot depends on the security available and the business circumstances.
Benefits of commercial mortgages
There are lots of reasons a UK company might prefer to purchase a trading property. There are also limitless reasons you can choose to apply for a commercial mortgage, such as:
- Avoiding the risk of rising rental prices impacting your profit margins.
- Future-proofing the business by releasing equity as the property appreciates.
- Releasing cash for investments or business expansion projects.
- Investing in new equipment, new trading premises, or other assets.
- Expanding your income by sub-letting or leasing parts of the building.
For many businesses, the costs of a mortgage are similar to monthly rental prices, but with the substantial benefit of owning a long-term asset with an identifiable tangible value for your balance sheet.
General terms on a UK commercial mortgage
Commercial financing is unregulated – that isn’t a bad thing, but it means that lenders have greater flexibility than regulated residential mortgage lending.
Therefore, it’s impossible to accurately illustrate the terms, interest rates, and deposit requirements since they are always calculated on a case-by-case basis.
However, we can provide some general terms that cover most of the products on the market:
- Commercial mortgage terms tend to run from five years through to 40 years as a maximum.
- Interest rates will be higher than on a residential mortgage as commercial lending is considered a higher risk.
- Deposit requirements are usually about 30%, so the typical LTV cap is at 70%.
- Lenders will need to assess your credit history and may offer less competitive terms if there are any issues to consider.
- The maximum commercial mortgage, and the interest rates, will depend on the reason for the mortgage. For example, you might need a higher deposit for a commercial property investment or a premise you anticipate sub-letting in part.
- Stamp duty is payable, so you’ll need to factor that into your property purchase budget.
- Most lenders offer a fixed interest rate deal, like on a residential mortgage, and these are often more competitive than the Standard Variable Rate.
- Fees payable include arrangement charges, valuation costs, administration levies and conveyancing fees.
Commercial mortgages for start-up businesses
It can be tricky to find an approval for a commercial mortgage as a start-up.
That’s because the lender won’t have any trading history to go on. As a result, there’s a much greater chance of the business not succeeding – and therefore ending up in a repossession scenario.
However, you can get a commercial mortgage as a new business, but you’ll need to have a decent deposit to ensure a lender is comfortable with the risk.
Many businesses have more value tied up in assets than available in immediate cash. So one way to improve the rates you pay, and make it easier to secure a commercial mortgage, is to offer additional security against another asset or another property.
For start-ups, you can consider:
- Offering security against the owner’s existing residential properties.
- Offering personal guarantees from the company directors.
We would recommend being confident you know the risks involved, though – if the business did cease trading, the lender might be forced to repossess your home to recoup their lost lending.
Moreover, a personal guarantee is often a condition of any commercial lending (even for established businesses).
But, directors should be aware that the lender could pursue them personally for debts if the business became insolvent and would be liable up to their agreed liability.
Refinancing through a commercial mortgage
Remortgaging a business premise can be an excellent way of raising capital if your company already owns its own premises.
Commercial mortgages are cost-effective, and the cost can be substantially lower than for other forms of loan or finance, therefore offering competitive rates on business borrowing.
You can remortgage an existing commercial mortgage or take out a new mortgage to release the equity required to repay other debts or invest back into the business.
Lenders will need:
- A recent property valuation figure for the premises.
- Trading accounts, including projected day trading book or accounting figures.
- To assess credit history.
Like a residential mortgage, the lower the risk exposure, the more favourable the terms and rates a lender will be prepared to offer.
We’d always strongly advise using an independent commercial mortgage broker before making any application.
Given the bespoke nature of business mortgages, there is greater scope to negotiate the terms. So it is often significantly advantageous to have a whole-of-market professional assess your borrowing requirements to ensure you’re getting the best deals out there.