We generally think of commercial mortgages as a business mortgage. However, commercial finance can be so much more and can be taken out in many different ways which makes it more niche than a residential mortgage.
Whether you’re looking to buy premises, secure land for development, expand or buy a business if you’re looking to take out a commercial property mortgage we’re here to help you understand how they work and how to get one.
What is a commercial mortgage?
Typically, a commercial mortgage is a loan secured against a property that isn’t a residential premise. However, it could be for a part residential, semi-commercial property i.e. a shop with flats above it.
Whether you’re an individual or company, if you’re looking to raise finance on a business property with commercial mortgages you don’t necessarily have to be the one to occupy the property, you could lease it.
As opposed to commercial loans a commercial mortgage means that you can borrow more on a secured basis. It means you could buy business property, buy land for development, further a buy-to-let portfolio or buy a business, to name a few.
But, what can you use a commercial mortgage against?
- Hospitality premises – Restaurants, pubs, hotels, gyms
- Semi-commercial premises – Part business part residential i.e. a shop with flats above
- Retail investment premises – Retail units or parks
- Industrial premises – factories or warehouses
- Care homes
- Specialist properties – General Practices (GP’s), schools, dentists, and vets
- Agricultural premises
The range of property types is vast, and these are just a few examples. Because of this an advisor who is experienced in commercial finance would be best placed to help you with your specific requirements as there are so many variations.
How does commercial finance work?
Commercial mortgages work very similarly to a residential mortgage. You’ll need a deposit, have set terms (i.e. 25 years), be aware of capped LTV (Loan to Value) ratios and pay monthly instalments to repay the capital.
As there are so many variations on commercial property, applications will be assessed on a case by case basis depending on lender criteria. It will also mean that rates will vary depending on the level of risk the investment poses to the lender.
Although there are many ways commercial finance can be taken out, they mostly boil down to two types of mortgage, Commercial Occupiers or Commercial Investment mortgages. It is important to note the differences between the two as you’ll need to know which suits your circumstances and have the correct requirements lenders will need to assess your application.
The intention with these mortgages is that as the buyer you intend to occupy the property yourself i.e. you will run your business from it with no intention of leasing it out.
Lenders tend to place emphasis on the following when assessing applications of this type:
- If you’re a start-up they’ll look at your business plans and will want to see projected accounts included.
- As an existing business, they will want to see account history usually from the last 2-3 years.
These mortgages are normally referred to as commercial buy-to-lets. As the buyer, you, therefore, intend to rent or lease the premises to another business or businesses.
Lenders will review your application with different criteria in mind:
- They will want to see any previous experience with this kind of property or buy-to-lets.
- They’ll also want to know the type of business premises or business use the premises has.
- If the property already has tenants in place, they’ll want to assess the quality of the lease and the leaseholder.
How can I get a commercial mortgage?
To get approval for either type of mortgage not only will you need to provide some form of the above but you’ll need to meet individual commercial lending criteria to which your application will be assessed on.
Again, this works very similarly to residential mortgages, but the key factors are:
- Affordability – calculated on business operating performance earnings these are generally reviewed before interest, tax, depreciation and amortisation. This will need to show that the business is profitable enough to afford repayments.
- Deposit amount – requirements will usually be higher than residential mortgages as LTV ratios are capped to around 75%, meaning you’d need a minimum deposit of 25%. Anything requiring a bigger LTV would need additional security to alleviate the higher risk to the lender.
- Applicant/business credit rating – having access to whole of market lenders means that it is still possible to secure a mortgage with bad credit or for new businesses with no credit file, there are specialist lenders out there.
- Viability of investment – having a strong investment plan can be key in the decision-making process. For commercial investments, lenders will want to see projected rental income with stipulations on rental coverage, whereas occupier mortgages will calculate based on ‘adjusted net profit’. Either way, having experience in the industry can help lenders determine whether the investment is viable.
When looking at which commercial mortgage lender to go with, while some high street lenders offer commercial mortgages you may not receive the best rates. Looking to the wider market could open a few more doors to you, however, many lenders won’t deal directly with you as a borrower and require you to work through a broker for commercial finance.
Speaking with a specialist advisor who has access to whole of market lenders can put you in the best possible position for commercial mortgage approval. Based on your or your businesses circumstances they’ll know which lenders you should approach and who are the best equipped for your circumstances.
Furthermore, an advisor can help you prepare an application as they’ll know what the lender requires from you to assess and process your application.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via firstname.lastname@example.org and we will put you in touch with a suitable specialist to handle your enquiry who has experience handling cases such as yours.