Commercial Mortgages
A Commercial Mortgage is a long-term loan utilised for the purchase or refinance of a commercial property. Can be used for a wide variety of properties including office buildings, warehouses, care homes, leisure operations, apartment blocks, professional practices and retail parks. Loans can be provided to owner-occupiers or to investment companies, where the property is then rented out.
Features
A commercial mortgage is a long term loan product, for further information see below;
What is a commercial mortgage?
A commercial mortgage is a type of loan for businesses to purchase or refinance a commercial property. The mortgage is secured by a first legal charge on a business premises.
A commercial mortgage can be used for
– Buying property
– Investment finance
– Property development
– Refurbishing owner-occupied business premises
Typical examples of commercial property include retail, leisure, office space, warehouses and storage, care homes, medical facilities, hotels, student residences, etc.
How do commercial mortgages work?
Commercial mortgages work in much the same way as residential mortgages. They are a long-term finance solution that’s repaid with interest charged monthly, and the property being funded with the mortgage acts as security for the lender. A default situation can result in the lender respossessing the property.
The major difference between a commercial and residential mortgage is serviceability. A commercial mortgage is decided by the income that the property earns unlike a residential mortgage, where the borrower’s income is the factor deciding servicability. Where the property is owner-occupied, the loan serviceability is tested against the profitability of the mortgage.
The term of the mortgage is agreed at the beginning of the loan and could be from 5 years and up to 30 years, whilst monthly repayments will be determined by the size of the loan and deposit, as well as the interest rate of the loan, which could be fixed or variable.
Key metrics considered for commercial mortgages
Like all specialist property finance, there are few ready-made options, so rates will be different for every project and provider, whilst lending criteria will a vary massively from lender to lender.
Some key metrics lenders will consider include:
- Personal and business credit history
- Affordability: can the property/business afford to repay the borrowing it has requested?
- The value of the loan and the loan-to-value ratio (LTV), what is the lenders exposure vs the value of the property/business they are taking as security. (typically, better rates are available with lower LTVs)
- The loan term (whilst most commercial mortgages are offered on a 5 or 10-year term, if the loan is amortising (Capital & Interest) the mortgage payments are typically calculated on a longer loan profile of 15-30 years to make payments more affordable. Longer term loans can be perceived as higher risk, as establishing the income used to repay the loan being sustainable for the long term is difficult for lenders.
- The property itself: location, property type, condition, etc.
- For owner-occupied mortgages: business type, financials and balance sheet strength
- For investment mortgages: the rental income, length of the lease and quality of the tenant
- The interest rate a lender can offer also depends on how they are funded and the underlying cost of capital. The rate for is also determined by the lenders perceived risk of the lend. Lenders will usually have a range, say 3%-5% above base rate, the higher the risk, the closer to 5% above base rate
Eligibility
Commercial Mortgages facilities are available to sole traders, partnerships, large partnerships, limited companies, limited liability partnerships (LLPs), trusts, self-invested personal pensions( SIPPs) and SSASs (small self-administered schemes (SSASs).
Advantages & Disadvantages
There are a number of considerations to be borne in mind before deciding if a commercial mortgage is right for your business.
Advantages
- Stability – Owning commercial premises provides the business with stability, i.e. more control over its use compared to restrictions of rented premises. There can be the possibility of renting out surplus space in the property in some cases to gain extra income, whilst mortgage payments are likely to be similar to rental payments. From strengthening a business balance sheet the business asset can potentially increase in value so it’s a worthwhile long-term investment.
- Lower interest rates – commercial mortgages will typically have lower interest rates than other unsecured borrowing. The interest on a commercial mortgage is also tax-deductible.
- Fixed Rate – With a fixed rate mortgage cash flow can be better managed – the ability to be able to accurately calculate how much is required to repay each month helps with cash flow and business planning.
- Long Term – as the term of commercial mortgages will typically be 20+ years, the business is better able to focus on other financial planning issues, i.e. expansion and employees.
Disadvantages
- Deposit requirement – a commercial mortgage will require a deposit. On average 20% to 30% is required which could prove challenging for some businesses. Whilst it may be possible to pay a lower deposit, higher interest rates will compensate for this, conversely higher deposits may produce better deals, as less of a risk to the lender.
- Variable Rate – If the mortgage is variable rather than fixed interest rate, the business will be subject to changes in interest rates (can go up as well as down) based on the Bank of England base rate. This can make financial planning and cashflow forecasting harder to manage.
- Property Value Risk – There is a risk that the value of the property decreases resulting in long-term implications for the business finances.
- Timeframes – commercial mortgages can take time to secure compared with short-term loans, such as bridging loans due to detailed checks, valuations and legal processes. Timeframes can be several months from the beginning of the process.
- Owner responsibility – all maintenance, security and the general upkeep of the property would need to be paid for and undertaken by the business.
FAQ’s
Can a business still obtain a commercial mortgage if refused by a bank?
Every lender will review an application on a case-by-case and perceived risk basis, so a mortgage may still be available if refused by a bank.
Partnering with a broker that has access to additional lenders increases your chance for approval.
What are the costs involved in taking out a commercial mortgage?
There are a number of costs to be aware of when obtaining a commercial mortgage:
Arrangement fee –
Given the costs involved in underwriting and credit analysis for a commercial mortgage, lenders will charge an administration fee for setting up the loan.
Professional fees –
There are usually several professionals involved in the project, such as: solicitors, conveyancers, insurers, etc. Their costs will depend on the scale of the project and may be included in the commercial mortgage.
Interest –
Interest will be charged monthly and may be fixed or variable depending on kind of mortgage.
Valuation fees –
To calculate the value of a property, a lender will require an independent third party to undertake a valuation.
Broker fees –
If a broker was used as part of the transaction, this will likely incur a fee.
Early repayment or overpayment fees –
If the mortgage is repaid early or overpaid in any one year, a penalty charge may be incurred as the lender is losing interest. The details of any fees for early repayment or overpayment will be outlined in the terms and conditions of the commercial mortgage.
Exit fees –
This will vary from lender to lender and is typically charged as a percentage of the total loan sum repayable at the end of the loan term.
What level of deposit is required for a commercial mortgage?
This would vary depending on the amount required to borrow, the business circumstances and the lender assessment of the business credit situation. As a guideline a minimum 25% of the total value of the property is typically required for a Commercial Mortgage deposit.
What is a capital repayment holiday?
A capital repayment holiday is essentially a period of time where a break is taken from reapaying the principle or capital element of the loan. However, the interest must still be paid into a servicing account and will continue to accrue during any repayment holiday, so it may take longer to repay the loan and cost more in the long run.
Are there different types of commercial mortgages?
The two main types of commercial mortgages are:
- Owner-occupied mortgages: For businesses purchasing property for their own operations
- Commercial investment mortgages: For investors (individual or company) looking to rent out commercial property. This type of mortgage is also required for mixed-use (commercial & residential) properties, where both the residential & commercial parts are on one freehold title
Next Steps
Snowball is highly experienced in the commercial mortgage market and can help your business navigate this often complex market. We have access to UK lenders who only deal with intermediaries, and as a truly independent broker we have access to a higher number of them.
For an initial no obligation call or meeting, please contact us below to arrange.