Commercial mortgages

Whether you need to purchase a new building or release equity from existing real estate — a commercial mortgage could be the solution.

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What is a commercial mortgage?

Commercial mortgages, also known as business mortgages, are loans secured against premises that are used for commercial purposes i.e. non-residential uses. Like with residential mortgages — fixed and variable interest rates are available.

Commercial mortgages are a long-term form of property finance, which is in contrast with bridging and mezzanine loans — both of which are shorter-term financing options.

Commercial mortgages — considerations

Commercial mortgages are appropriate for any type of commercial-use property. So properties such as warehouses, industrial units, office complexes, shopping malls, retail shops, restaurants, surgeries etc. Properties that have both residential and commercial elements (mixed-use), are usually classed by banks as commercial mortgages.

Many companies will start off by leasing the premises they operate from. Acquiring your own business premises, will allow you to replace your rent payments with mortgage loan repayments — potentially allowing you to benefit from any increases in real estate value. Further, you may be able to arrange a mortgage for a bigger premises than you actually need, and subsequently rent a portion of the property to another company — which can help with your repayments.

With commercial mortgages you may have a bit more stability, in that you won’t be dealing with sudden increases in rent payments or be given unwanted notice to move out. With fixed rate mortgages, your monthly repayments do not fluctuate, which contrasts with variable rate deals — where rates may rise as well as fall.

One key difference between a residential and commercial mortgage, is that commercial mortgages tend to come with higher interest rates attached. This is primarily due to that fact that commercial mortgages, are seen as higher-risk. A good way to offset this, is by offering a higher initial deposit — which reduces your loan to value (LTV) and lowers your interest rate.

Commercial mortgages can be classed under 3 basic categories — owner-occupied, commercial-buy-to-let and residential buy-to-let:

  • Owner-occupied: used when your company wants to buy a property for its own business purposes. For example, you may want to buy the office your company operates from or purchase a new warehouse to stock your goods
  • Commercial buy-to-let: used to buy commercial property, in order to let it out to other companies. For example, you might buy an office building to let out to other businesses
  • Residential buy-to-let: used when businesses or individuals, buy buildings to rent out to people as living space. This is particularly used by buy-to-let limited companies and professional landlords

How do commercial mortgages work?

A company interested in a commercial mortgage, would need to submit an application with a mortgage lender. In the application you would need to highlight the reasons for seeking the mortgage loan. Reasons could be: buy-to-let, buying for business use or wanting to release capital — by remortgaging a commercial property you have equity in.

Along with the purpose of the loan — lenders will look at your business credit ratings, trading history, balance sheet statements, income statements, cash flow statements etc. What they’ll look for is evidence that your business will be able to repay the mortgage.

All this information will also let lenders set an appropriate interest rate — be it fixed or variable. Companies with good cash-flow, assets and offering larger deposits — are likely to be offered lower interest rates. Property location is also key — with some cities being more commercially viable than others.

Should a mortgage be offered — it may last from 3 to 30 years, and you could be given the option for capital repayment holidays. The deposit required and the monthly interest to be paid — will be stated. Any offer will also be based on conditions being met i.e. valuations being completed or surveys done.

Other costs to take into consideration include your standard valuation, legal and arrangement fees. You should also be aware of any early repayment fees.

Benefits of a commercial mortgage

  • You retain complete ownership of your company and premises
  • Commercial mortgages can be cheaper than paying rent
  • Potential for increases in property prices — capital gains
  • Relatively low interest rates — compared to unsecured borrowing
  • Sub-letting potential — if you have additional space

Limitations of a commercial mortgage

  • Need to raise a significant deposit — commercial mortgages are low LTV
  • You are responsible for maintaining your own property
  • Property prices may fall
  • With variable interest rates — monthly repayments may increase
  • Property can be repossessed — if you fail to keep up repayments.
  • Some lenders set minimum mortgage amounts

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