Andy Done talks all about Commercial Mortgages.
Whether you’re buying for the first time, moving, investing or remortgaging we’ve got it all covered.
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Andy Done talks all about Commercial Mortgages.
What is a Commercial Mortgage and how do they work?
A Commercial Mortgage lets trading businesses borrow money to buy property or land for their business, or investors can buy commercial investment property to rent to other businesses. The money is borrowed from a high street bank or specialist lender and the client pays it back on a Capital Repayment or Interest-only basis.
What is the difference between a Residential and a Commercial Mortgage?
The main difference is that a Residential mortgage is used to buy a home and is taken out by an individual. A Commercial Mortgage is taken out by a company and is used to buy commercial property. Lenders use your personal income when assessing affordability for a Residential mortgage. For a Commercial Mortgage, and when assessing an owner-occupier mortgage the business income is used. For a commercial investment mortgage, the rental income is used for affordability.
Are Commercial Mortgage rates higher than Residential rates?
Yes, commercial rates are usually higher than residential rates. High street banks offer the lowest rates available, challenger banks have more flexible criteria, but the interest rates are a bit higher and specialist lenders have even more flexibility, but their interest rates can be a bit higher as well.
What Criteria do I need to meet for a Commercial Mortgage?
Commercial Mortgages normally require a minimum deposit of around 25%, owner-occupier mortgages will typically be on a Capital Repayment basis and the maximum term is usually between twenty five and thirty years, depending on the age of the owner.
Commercial investment mortgages can be Interest-only, but are usually over a shorter term and deposits required can be as high as 40%, depending on the type of business and property. Most lenders are willing to consider a wide variety of commercial and residential property types, including offices, warehouses, factories, land, certain Buy to Lets and things like guest houses.
Mortgage applications are welcomed from most business types in the UK, this can include limited companies, partnerships, sole traders and limited liability partnerships. The lenders will usually do a credit check as part of the application process and most mortgages can be arranged without the need for a meeting, but in certain circumstances or if you’re borrowing high amounts of money, lenders will sometimes request a meeting in person with the applicant and the broker can go along with them.
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How much can I borrow and how much deposit do I need for a Commercial Mortgage?
The amount you can borrow varies from one Commercial Mortgage Lender to another. It’s determined on a case-by-case basis and you need to show that the business is profitable enough to cover the mortgage and interest payments. This can be done by looking at the accounts for the last few years.
Commercial Mortgages typically require a minimum deposit of 25% and it can be up to 40% for certain types of businesses. Some banks will allow lower deposits for certain professions, such as doctors and dentists, who sometimes borrow up to 100% if they are looking to buy a practice, and manufacturing companies in certain circumstances can have a 20% deposit instead of a %25 deposit.
What other fees and costs are involved with Commercial Mortgages?
Usually a broker will charge a fee for helping out with submitting the application, and dealing with the lender, and this can vary substantially from company to company. Most brokers will set out their fees at the start and explain exactly what it’s going to cost them.
There’s also a valuation fee, as someone will have to go out to visit the property and write a valuation report on the property. Valuation fees are typically on a sliding scale based on the purchase price of the property, so the more expensive the property, the higher the valuation fee.
A product (or arrangement) fee is typically added to the loan after it’s approved, but some lenders may request this a bit earlier on. Arrangement fees are usually between 0.75%-2% of the loan amount, and this depends on the type of lender. High street banks generally have lower fees, whereas more specialist lenders can have slightly higher fees. Other fees to think about are solicitor’s fees for completion of the legal work.
Do you pay Stamp Duty on commercial property?
Stamp Duty is payable if you purchase a commercial property only if it’s worth more than £150,000, and is calculated based on the value of the property.
Is a Commercial Mortgage tax deductible?
The interest payments on a Commercial Mortgage can be tax deductible. We never give advice on this sort of thing and we always recommend you speak to your accountant to check exactly what is tax deductible and what isn’t.
How long is a typical Commercial Mortgage?
To set up a Commercial Mortgage it normally takes between six and eight weeks from start to completion.
How do I apply for a Commercial Mortgage?
You can apply for a Commercial Mortgage by contacting a broker like ourselves. Some people will contact the bank that they do their business banking with, but as a broker, we have access to the whole of the market, so we can make sure that you use the most suitable lender.
We will usually submit the application for you, gather all the information together, speak to the underwriters and provide them with your business information. They’ll wait for the valuation to be instructed, and once this has been completed and signed off, the mortgage offer will be issued.
Can I Remortgage my commercial property?
If you own a commercial property, you can look at a Remortgage, which involves switching from one mortgage product to another and often changing to a new mortgage provider. There are a number of reasons for this, you may want to switch to a product with a lower interest rate or a Fixed-rate. If you took a Fixed-rate mortgage in the first place and you’re about to go on to the lender’s Standard Variable Rate, it’s a good time to explore your options.
You may want to release equity from your commercial property if you’re the term of the mortgage, and you can always look at Remortgaging and raising additional funds, which can be used for business purposes. If you want to borrow against the increased value of your property, as property prices have increased over the last few years, you may be able to get into a lower Loan to Value bracket.
How can a Mortgage Broker help if somebody’s looking for a Commercial Mortgage?
A Mortgage Broker can help with the application, help choose the product, and help guide you through the process, but the main benefit is experience. We’ll be able to help you from start to finish, hopefully speed things up and take the stress out of applying for a mortgage.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.