Entrepreneurs, business owners, and investors actively seeking a commercial mortgage could lock in some of the lowest and best commercial mortgage rates in history right now. That’s not an exaggeration – the Bank of England’s base rate has never been this low since it was established way back in 1694.
Despite this, competition amongst mortgage providers is fierce as they seek new avenues of lending while they wait for the residential market to recover – the volume of home sales is still nowhere near what it was before the financial crisis of 2007-2008.
The commercial mortgage market is, at the moment, a buyer’s market. Assuming that your application to buy business property is financially sound, you’re likely to receive offers from different lenders making a true commercial mortgage rates comparison possible for you – this is a real opportunity to get the best deal available.
If you wish to purchase commercial property for the first time or if you are a serial investor wanting to reduce your mortgage repayments on existing commercial property that you own, we hope that you find this following article useful and actionable.
What is a commercial mortgage?
A commercial mortgage is a secured loan taken out by a business, individual, or investor to purchase business property.
Owner occupier commercial mortgages
For business owners wishing to purchase the premises they intend to trade from, they should apply for an owner-occupier commercial mortgage.
Commercial investment mortgages
For individuals, investors, and business owners wanting to purchase property which they intend to let out to other companies, they should apply for a commercial investment mortgage.
The difference between a commercial investment mortgage and a buy-to-let mortgage is that a buy-to-let mortgage is obtained on residential property (including HMOs).
You should apply for a semi-commercial mortgage if the property you wish to purchase can be used for both business and domestic purposes – for example, a property containing a flat above a shop or a B&B with owners’ accommodation included.
The 5 main advantages of taking out a commercial mortgage
1. Tax deductibility
The interest on commercial mortgage payments is 100% deductible for corporation tax (or income tax if you purchased it as an individual).
2. At some point, your business will stop paying for its premises
At the end of your mortgage, you will not have to make any further repayments on the property freeing up a lot more cash in your business.
3. Equity in your commercial property can be used to finance your business
If the property you purchase accrues in value, then the equity in it will increase. Equity is the difference between the value of the building and the remaining mortgage on it. You may choose to use this equity as security on further borrowing to expand your company or to purchase other commercial properties.
4. Current and future rental opportunities
For owner-occupiers, you may wish to rent out unused parts of your property to other businesses to bring in extra income. If your company outgrows these premises in the future, you may decide to rent out the entire building to other firms.
5. You can switch providers just as you can with a residential mortgage
Given that the commercial mortgage market is so competitive, you can switch to a different provider offering lower mortgage repayments later on. Before you do, make sure that you’re not liable for any early settlement fees on a fixed rate deal (more on that below).
Deposit needed when taking out a commercial mortgage
You will generally need to find a deposit of up to 25% of the value of the property to apply for a commercial mortgage. Better and cheaper mortgage deals are available with higher deposits.
Commercial mortgage with smaller deposits (or even a 0% deposit) may be available if you offer additional security (for example, your residential property).
What are the different types of commercial mortgage?
Capital and repayment mortgages
With this type of mortgage, you repay part of the outstanding balance on your mortgage plus interest each month. When the mortgage term ends, you no longer owe any money on the property and it belongs entirely to you or your business.
With an interest-only mortgage, you only pay the interest on your mortgage account – the full balance remains outstanding. Interest-only commercial mortgages are currently very hard to find.
Variable rate commercial mortgages
On a variable rate commercial mortgage, your monthly repayments may either increase or decrease depending on the level of the Bank of England’s base rate.
Commercial mortgage rates are normally quoted as “base rate (sometimes LIBOR)” plus X%. So, if the “plus” is 3% and the base rate is 1%, the effective interest rate on your mortgage is 4%. However, if the base rate moves to 1.5%, your effective interest rate will rise to 4.5% meaning that your mortgage payments will increase.
Fixed rate mortgages
Some commercial mortgage companies will fixed their interest rate at a competitive level for a set period of time. Once that period of time has expired, the mortgage will become a variable rate mortgage.
If you attempt to switch providers during this period, you will likely to have pay your mortgage company an early settlement fee.
How much can I borrow with a commercial mortgage?
You can borrow up to the value of the property you wish to purchase minus the deposit as long as:
- if it is an owner-occupied mortgage, you can demonstrate that your business will be able to make repayments from cash flow
- if it is a commercial investment mortgage, that rental payments from business tenants will more than cover the mortgage repayment, that you have accounted for void periods, and that you have costed in the future maintenance and upkeep of the property.
What will you need to show a commercial mortgage lender?
In addition to your identity documents, you’ll need to show:
- bank statements and cash flow statements over the previous 3 years,
- profit and loss statements over the previous 3 years,
- evidence of personal income,
- a business plan containing financial projections for
- revenue from your business if this is an owner-occupier mortgage application
- revenue from tenants if you’re applying for a commercial investment mortgage
Commercial investment mortgage applicants may also need to provide:
- tenancy and lease agreements from current occupiers of the property they wish to purchase and
- evidence of their existing property portfolio and its income streams (if applicable)
The commercial mortgage application process
The process of applying for a commercial mortgage has much in common with the process of applying for a residential mortgage.
You will first have to complete an Asset and Liability form followed by your commercial mortgage application. Your lender will also want information on your business and a valuation on the property you wish to purchase.
A more intense form of due diligence will then be carried out by the lender’s solicitors than for a residential purchase. If all is well, you should finally receive an offer from your lender.
Lender versus broker
Many commercial mortgage lenders welcome applications direct from potential clients.
However, despite the fact that a broker will charge you for their services, it may be cheaper and quicker to use a broker for the following reasons:
- access to specialist lenders who do not accept direct applications from clients
- access to products exclusively designed for brokers and not on offer to the public directly
- unless a deal is presented or “packaged” in the right way to the underwriter, it will be declined
If you choose to engage a broker, you should only use one at a time because lenders will not be impressed if they receive your application multiple times from different sources.
How much will my mortgage repayments be?
The size of your mortgage repayments will depend on:
- how much your mortgage is for,
- the interest rate applied to the mortgage, and
- the “term” of your mortgage – in other words, how long you’ll be repaying the mortgage for.
Most commercial mortgages are for a term of 15-30 years although some lenders will allow a term of up to 40 years. The longer your term, the lower your mortgage repayments however you will pay more in interest overall.
Please note that, for semi-commercial mortgage applicants, you may be charged a higher interest rate by a lender:
- if you purchase a premises with a business included which you intend to keep running but you have little or no experience in that line of trade or
- if you intend to let out the commercial part of the property to a business and the residential part to a private tenant and you have had two or less years’ experience as a buy-to-let landlord.
5 types of fee you pay when applying for a commercial mortgage
There are five main types of fee that you will be charged by various different parties as part of your commercial mortgage application.
1. Product fee
Sometimes called “arrangement fees”, this is charged by the lender for arranging the mortgage. Similar fees are applied to residential mortgages. Arrangement fees can be up to 2% of the value of the facility.
2. Commitment fee
Some lenders levy an additional charge to cover their costs in processing your application. Generally, commitment fees are non-refundable.
3. Legal fee
With commercial mortgage applications, you are often expected to pay both your own legal fees and the lender’s legal fees.
4. Valuation fee
Commercial property valuations are much more extensive and in-depth than residential valuations. A valuer will send you a quote for their services which you will normally have to pay upfront.
5. Broker fee
If you use a broker, their fee is likely to be around 1% of the value of the mortgage subject to a minimum charge.
Commercial mortgages FAQ
Can you take out a commercial mortgage on a leasehold property?
Commercial mortgage lenders will generally consider applications to purchase a property with 70 or more years left on the lease. If there are less than 70 years remaining, you may have to offer additional security to the lender.
What if my company and/or I have a poor credit rating?
It is extremely likely that any lender you apply to will perform full credit searches on you and the business(es) you run.
Underpinning all commercial mortgage applications is a business plan and, if a lender considers the plan as realistic and achievable, a poor credit rating does not mean that your request for funding will be declined.
There are bad credit commercial mortgage providers whose underwriters will seriously consider applications from clients and their businesses which have:
- a history of late or missed payments on other credit agreements
- a number of satisfied County Court Judgements, and
- applicants who have been discharged from bankruptcy or a debt management plan more than three years ago.
If you have poor credit and your application is approved, it is reasonable to expect that the lender may charge you a higher interest rate on your commercial mortgage.
Will I get a mortgage if mine is a fairly new business?
It will be more difficult because:
- for owner-occupied mortgage applications, you don’t have historical records going back long enough to show that your business is viable over the long term
- for commercial investment mortgages, you don’t have a track record of property ownership and the management of commercial tenants
- for semi-commercial mortgages, a mixture of the two reasons above plus a lack of knowledge in dealing with residential tenants.
It is still possible but you should expect to pay higher interest rates, to be asked to find a bigger deposit, and, perhaps, to offer additional security.
Should I use a business mortgage calculator to work out likely repayments?
Online business mortgage calculators can be useful in working out the size of monthly repayments on your commercial mortgage. However please bear in mind that the only way you’ll find out what you’d actually pay each month for your new commercial property is by making an application direct to a lender or via a broker.
Which commercial mortgage is best?
Each commercial mortgage provider specialises in dealing with different borrowers wanting to lend money on certain types of property for varying reasons. The best commercial mortgage for you would be one with a provider which understands you and which understands what you want to achieve.
Most commercial mortgages are arranged via a broker because of their deeper knowledge of the business property market, the trust built up in their working relationships with lenders, and the ability to match the right borrower with the right lender.