The Guide To Commercial Mortgages

In this Commercial Mortgage Guide, we discuss the business lending options that you may have not been aware of. if you are interested in expanding your business, this article is for you.

What is a commercial mortgage?

Commercial mortgages are specifically designed to facilitate the purchase or refinancing of land or property for business purposes. Just like a typical residential mortgage, funds are borrowed and used as collateral against a property.

They can also be utilised to enhance an already established business and for the development of residential or commercial properties. When a business is secured to a property, such as pubs, restaurants, or guesthouses, it becomes the primary source of financing for any business development plan.

The commercial mortgage market, while smaller in size compared to residential mortgages, holds a significantly higher value. A commercial mortgage differs from a residential mortgage as it provides financing in four particular ways:

  • Buying business premises
  • Securing land development ventures
  • Developing an owner-occupied business
  • Adding to a buy-to-let portfolio

Commercial mortgages are designed to meet the needs of both the lender and the borrower. The lender requires collateral for their loan, while the borrower seeks to enjoy lower monthly payments compared to renting.

A commercial property mortgage typically offers a long-term loan, typically up to 25 years, to finance the acquisition of a business premises. The mortgage lender usually provides a loan of up to 70% of the property’s value. This allows the business to make its mortgage payments and use any available working capital to support its growth.

Commercial mortgages typically provide financing for up to 70% of the property’s value, leaving the business responsible for securing the remaining funds to finalise the purchase. This can be a significant sum of money to come up with.

The benefits of a commercial mortgage

A commercial mortgage is not just a means to house your business, but is now being recognised as a valuable source of business funding.

Having your own business premises can help you avoid the uncertainty of rising rental costs. Commercial mortgages provide a valuable opportunity for businesses to secure their future by tapping into the growing equity of their property over time.

Choosing a commercial mortgage offers numerous benefits that aim to provide future sources of funding and finance:

  • Release capital for investment or growth
  • Consolidate business debts
  • Purchase new equipment
  • Expand trading
  • Can be cheaper than renting
  • Option for sub-letting or leasing parts of the property to create extra income

Business owners have the option to utilise a commercial mortgage for various purposes such as acquiring a business property for their own use, renting it out, buying a company, or tapping into the equity of existing buildings. Financing your property purchase has become more flexible, as long as you have tangible assets to secure against.

outside of an office building

Applying for a commercial mortgage

There is a wide range of lenders that provide commercial mortgages. It is crucial to select the most suitable option for your needs.

There can be variations in rates and commercial speciality. Certain lenders have specific criteria for offering mortgages. Some require ample asset security, while others prefer to lend to owner-businesses or focus on funding land developments.

Every potential borrower will undergo specific financial checks. These typically include:

  • Three years of accounts (or tax returns)
  • Current and projected performance figures
  • Bank statements
  • Details and profiles of all directors and partners of the business
  • Asset and liability statements

Mortgage term

The loan term can vary significantly, ranging from 5 to 40 years. Understanding your goals and the expectations of your mortgage lender is crucial when considering a significant financial commitment like a commercial mortgage.

Repayment

Interest rates for commercial mortgages are generally higher compared to residential mortgages due to the perceived higher risk involved in lending for commercial properties. It is possible that you will need to provide a higher deposit of at least 30%, resulting in a lower loan to value (LTV) rate. However, the advantage is that you will have a greater amount of equity.

Credit history

The approval of your commercial mortgage application will heavily depend on your credit history. Nevertheless, it’s not just the sole focus that is taken into account; you must also present a thorough overview of your company, including projections and a well-crafted business plan.

Property usage

There is a significant variation among commercial mortgages, as the purpose and utilisation of your property will impact the borrowing amount and the interest rate provided.

When you purchase an office block for your business and later choose to redevelop and sub-let part of the space, your commercial mortgage transitions from being for an owner-occupied business to an investment business. Often, this can result in a decrease in your LTV.

Stamp Duty

Stamp Duty Land Tax (SDLT) is payable on all properties and the rate varies. Learn more about Stamp Duty rates on the Government Website here.

Interest rates

The variable rates are determined by the Bank of England base rates and will fluctuate based on the prevailing rate at any given time. This type of loan offers fixed rates for a specific period, typically up to 5 years. This provides businesses with the benefit of guaranteed repayments that can be factored into their financial projections.

Fees

Just like with a residential mortgage, there are several fees you should anticipate paying, including a conveyancing (legal) fee, arrangement fee, valuation fee, and administration charge.

Tax

Tax deductions are available for the interest payments that you make on your commercial mortgage.

Refurbishment

It is important to carefully consider the expenses associated with renovating, installing facilities, decorating, and general refurbishment for your property.

Renting out your property

A popular and viable option for business owners to maximise the earning potential of their premises and offset the cost of their repayments.

Commercial mortgages for start-ups

If you’re in the market for purchasing premises for your start-up business without any trading history, you’ll need a significantly lower LTV ratio.

When seeking funds for your property purchase, lenders often recognise that many companies have valuable assets but limited cash flow. In this scenario, security will be accepted from an already established property.

For many start-ups, utilising an existing property, like their own residential property, can prove to be a valuable strategy for obtaining a commercial mortgage. This arrangement is widely accepted by most lenders, and there may be room for further negotiation in the future, particularly once equity levels have been reached.

Utilising a commercial mortgage to secure your property can greatly benefit the future financing of your company. When the property value increases, so does your business capital. As the equity increases, you have the opportunity to utilise it for additional funding to support your growth or expansion plans.

If you’re facing refurbishment costs or a delay between purchasing and moving into a new commercial property, bridging loans can provide a solution for a seamless transition.

calculator on financial documents

How refinancing works

If your company already owns its own premises, remortgaging it presents the opportunity to release equity within it.

It can be used as a highly economical funding option, particularly when property prices are expected to rise. It can then help you save money by reducing the costs of your borrowing or securing better rates on your loans.

Refinancing a commercial mortgage involves the process of paying off one mortgage and replacing it with another. Typically, this is done to obtain more favourable interest rates, allowing the business to have more cash available.

If the business owns, or even part owns a property, it is possible to refinance your mortgage. Commercial mortgages are structured and established in distinct ways compared to residential mortgages. When a business chooses to refinance the terms of their mortgage, they can rely on updated finance and valuation figures to support their negotiations.

Having comprehensive financial information, such as new accounts, projections, or detailed balance sheets, can positively impact the lender’s decision to provide lower interest rates or increase the loan amount for the company. Showing a stronger credit history can give lenders more assurance in your repayment capabilities, potentially leading to better interest rates.

Reasons to refinance

Given the amount of time that has passed since your initial mortgage application, it’s probable that your accounts and credit history have seen some positive changes. It suggests that you may be eligible for more favourable terms and interest rates compared to what you are currently paying.

Lower interest rates

By capitalising on the current lower interest rates in the market, businesses have the opportunity to save a substantial amount of money and decrease the overall interest payments on their loans. This is most noticeable in the form of lower monthly payments.

Equity Release

Refinancing allows businesses to unlock the equity of their property, providing them with the means to fund new projects, acquire equipment, or invest in other areas of growth.

If you require funding for growth or expansion, refinancing allows you to access it by utilising equity. This option is likely to provide you with a more favourable rate compared to a standard business loan, as you are offering a significant amount of security for it.

Debt consolidation

If you’re struggling to repay multiple debts, consolidating them into a single repayment can simplify the process. By remortgaging, you can consolidate your monthly repayments into one more manageable amount, provided that there is sufficient equity in your property.

Mortgage rates are frequently more favourable and cost-effective compared to other types of commercial borrowing. It’s important to consider the potential long-term costs, even though this solution may be manageable in the short and medium term.

Difficulty in refinancing

Refinancing a commercial mortgage can be just as time-consuming as obtaining your initial mortgage. It’s important to keep in mind that there may be early repayment fees imposed by your initial lender.

Gathering an enormous amount of financial data, balance sheets, projections, and forecasts, as well as the financials of all key stakeholders in the business, is a crucial aspect of refinancing. Without the ability to provide your profit and loss sheet or cash flow, securing a mortgage refinance may prove to be challenging.

Refinancing your mortgage can have a significant impact on your business, just like any other major financial decision. It has the potential to lower your payments, increase your available cash, and result in monthly savings.

Get Expert Advice

As a whole-of-market mortgage broker, we have access to a wide range of lenders, as a result, we can offer the best mortgage solution for you and your needs.

To discuss your lending requirements, speak to one of our experienced brokers today on 0800 195 6345, or email us at info@dolphinfinancialltd.co.uk, or fill out our contact form here.

Important Info

Your home may be repossessed if you do not keep up with mortgage repayments.

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