Getting a commercial mortgage or, as a matter of fact, a mortgage of any
Before you begin your search, it is vital that you understand your budget and the anticipated growth of your business.
Generally speaking, commercial mortgages last for 15 years or longer and, like a residential mortgage, failure to meet repayments can put the premises at risk.
Most banks and building societies offer commercial mortgages – dependent on the business owner meeting their lending criteria.
Although some lenders will still accept applicants with a bad credit rating, it will work strongly in your favour to have a clean credit score, as it will give you a wider range of choices and more competitive rates.
Lenders will apply a loan-to-value ratio and often require the business owner to invest some of their own money into the property. The more money you invest, the more likely it is that you can secure the mortgage.
The lender will require financial information showing whether your business is profitable or not, such as accounts and revenue projections.
Some lenders will impose restrictions – for example banning the owner from subletting the premises to tenants. If subletting is something you may be interested in then it is worth seeking the advice of a solicitor.
There are often additional costs associated with getting a commercial mortgage so it’s worthwhile looking into these before embarking on your search for the right deal. These can include arrangement fees (usually ranging from 0.5% to 1.5% of the loan), legal fees and valuation fees.
Finding the right deal
Like a residential mortgage, it is always worth investing some time and effort into seeking out the best possible deal for you and your business.
The high street may seem like an obvious place to start. However, it may not be the most competitive in terms of pricing.
Alternatively, you should consider using the services of a commercial mortgage broker.
A broker can search the market for the best deal and rates for your business and its needs. A good place to find a specialist mortgage broker is the National Association of Commercial Finance Brokers.
Information for the bank
It’s worth preparing your commercial information well in advance to ensure your application goes smoothly.
The majority of lenders will request a lot of information and this will often include evidence of performance. The lender’s primary concerns will centre on whether you will be able to repay the loan in its entirety.
If you happen to be buying a commercial property and a business together, additional information may be required – for example:
Your current performance and credit status
Your business plan
A plan for repaying the loan
Audited accounts for the last two years in business
A forecast for profit and loss over the next couple of years
Details of all key stakeholders
Details of personal investments
Repaying the mortgage
Repaying a commercial mortgage is very similar to repaying a residential mortgage. But because commercial mortgages are generally seen as more of a risk to lenders, you should expect the interest to be slightly higher.
It may be helpful to put down a deposit of between 20% and 30% of the overall price as some lenders charge a higher interest rate to offset the higher risk they take on for deposits of less than 20%.
Fixed rate or variable
In the commercial property market, mortgages are usually fixed rate or variable.
Fixed rates usually last between two and five years and tend to provide more stability – but you won’t benefit from any changes in the base rate.
Variable rates, by contrast, will allow you to benefit from any reductions in the base rate, but you will also pay a higher price if the base rate increases.
A repayment mortgage involves repaying the capital and interest on a monthly basis. This option ensures that you cover everything that you have borrowed.
An interest-only mortgage is also repaid via monthly repayments, but you only pay back the interest on the amount borrowed.
With this option, lenders will want evidence of insurance or an investment policy – so they can ensure they are covered if there is outstanding capital at the end of the term.