Getting a commercial mortgage can be stressful. They are generally larger and more complex than a residential mortgage, with the applicant required to provide lots of information to meet the lender’s criteria.
Every single commercial mortgage application is different. There is no ‘three times income’ rule like there is for residential mortgages, so you’ve got to be prepared to jump through hoops for a lender, providing requested documents, to secure a good deal.
A good broker will make things easier for you, ensuring you can access a full range of commercial mortgage lenders and secure a good rate – but it helps if you know what to expect before engaging in the process.
What type of mortgage do you need?
There are two main types of commercial mortgage, which are outlined below. Which one you require depends on whether you intend on using the premises for your own business, or if you’re going to rent it out.
Commercial investment mortgages
If you plan to purchase a property in order to rent it out, then you will need a commercial investment mortgage. The amount a lender will be prepared to loan you will depend on factors like rental income and the quality of tenants (i.e. how likely it is that they will pay on time).
It can be difficult for a lender to make an assessment on tenants; so, the more tenants, the less perceived risk, giving your application a better chance of being approved.
You will need prior landlord experience because lenders will ask for a copy of a lease or an Assured Shorthold Tenancy (AST) when conducting the deal.
Owner-occupied mortgages
If your intention is to operate your business in the premises, then you will need an owner-occupied mortgage. These types of commercial mortgage are generally easier to organise, as lenders perceive the risk to be lower due to a lack of third party and rates.
The maximum borrowing for a commercial mortgage is likely to be around 70-75% loan-to-value (LTV). In other words, you will have to provide a substantial deposit of 25-30%. In comparison, a residential mortgage can be up to 95% LTV with just a 5% deposit.
Meanwhile, it is generally considered uneconomical to borrow less than £75,000 on a commercial mortgage due to the legal and admin costs involved. Some lenders have minimum loan requirements.
Benefits of a commercial mortgage
You could also choose to take out a business loan to buy a commercial property, or simply rent premises to save on capital – but a commercial mortgage brings some unique benefits:
Lower interest rates
Commercial mortgages generally come with lower interest rates in comparison to other types of loans. Also, from a cash flow perspective, having fixed monthly payments for your commercial mortgage will enable more accurate forecasting.
Capital gains
There is a good chance that the value of the commercial property you buy will rise over time. That being the case, your firm’s capital will increase.
Something to show for your investment
When renting a property, whether it’s commercial or residential, you’re essentially paying off someone else’s mortgage and you have nothing to show for the investment at the end of the agreement.
Increase income
If you own the property, any surplus space or land that you are not using can be rented out, bringing in more income for your business.
Full control over the building
When you are in rented premises, you don’t always have much of a say over the presentation and upkeep of the building. However, when you own the building, you can create a space that is right for your employees and customers.
Secure the best market rates on your commercial mortgage
Here at Bespoke Commercial Finance, we are highly experienced across all aspects of the commercial mortgage sector. We have no current ties or affiliations with any mortgage provider, meaning we can access a full range of commercial mortgage lenders and guarantee the best rates.
With options to pay over 25+ years, taking out a commercial mortgage with Bespoke Commercial Finance is more affordable than you may think. For trading businesses, we ask for two years of accounts and financial reports to get the ball rolling.
Let us put you into contact with the correct provider, tailored to your requirements.