Do you have business expansion plans in the pipeline? Is your goal to own your premises? Are you considering purchasing a property to rent out to another business or as a residential let? If the answer’s yes to any of the above, you could be in the market for a commercial mortgage. But what is a commercial mortgage and how do they work?
What are commercial mortgages?
A commercial mortgage is a type of business loan designed for the purpose of purchasing premises either for your business to occupy or for you to rent out as a commercial or residential investment.
An owner-occupied mortgage is the type of commercial mortgage you’d go for to purchase a property to use as a trading premises for your own company. On the other hand, if you’re planning to let out the property, you’d opt for a commercial investment mortgage.
As with a residential mortgage, you borrow money from the lender and it is secured against the property. Although commercial mortgages make up a smaller share of the market than residential mortgages, their value is understandably much higher. Securing a business to a property can also be a way of financing a business development venture.
What are the main types of commercial mortgage?
A residential buy-to-let mortgage is required when buying a residential property to let out to residential tenants. It’s a type of mortgage that is used by landlords with one rented property, those with an extensive property portfolio and anywhere in-between. As well as individual landlords, specialist buy-to-let companies also utilise residential buy-to-let mortgages.
Buy-to-let mortgages also exist for commercial properties. For instance, you could purchase an office or a warehouse through your company and rent it out to another business. Commercial real estate tends to be more challenging to rent out, therefore lenders will assess a range of factors. Rates will depend on the sector and your longevity in the buy-to-let sector (as well as how reliable the tenant is deemed to be).
A company who wishes to buy the premises it operates from or a new on altogether will look into securing an owner-occupied commercial mortgage. Typically, a minimum deposit of 25% is required. It’s possible to get a commercial mortgage of this kind from anywhere between three and 30 years.
Before approving a commercial mortgage the lender has to be confident that the company can afford it. Lenders could look at the business’ trading history as well as its business plan and forecasting.
It’s also possible to get a commercial mortgage on semi-commercial properties, such as a pub with an apartment above, as long as the residential space comprises 40% of the property or less.
What deposit is needed for a commercial mortgage?
Commercial mortgages are considered on a case-by-case basis.
When asking what deposit is required for a commercial mortgage, the answer will very much depend on a variety of things, such as the type of commercial mortgage you need (owner-occupied or buy-to-let), as well as factors such as your credit rating and industry experience. It could be anywhere between 25% and 40%.
Owner-occupied mortgages can usually be obtained with a 70-80% loan-to-value (LTV). The LTV on a buy-to-let mortgage doesn’t usually exceed 75%. Also, keep in mind that lenders typically need the rental income to be 25–30% higher than your mortgage payment.
The lender looks at the following factors when calculating the level of ‘risk’:
1. Credit rating
The commercial lender will assess your credit rating and history when making a decision. Fortunately, there are lenders out there today who specialise in business finance for bad credit. Nevertheless, you may be asked to provide a larger deposit to minimise the risk.
Some commercial mortgage lenders specialise in first-time investors. You’ll be expected to produce a solid business plan and, again, a larger deposit may be requested by the lender. The majority of lenders favour those with a two to three years minimum of trading history and experience in the specific industry.
Of course, the lender will also assess your business’ performance, profitability and earnings in order to judge whether the commercial mortgage is affordable for you. If the lender deems you profitable enough, it will be more open to accepting the minimum deposit.
There’s a whole host of other things that come into play too.
For instance, if your company owns lots of properties in a single location, securing a new commercial mortgage could pose a challenge because you may have reached what’s called the ‘concentration limit’. This means if the market decreases in the area you own a lot of property in, you’re in a more vulnerable position than you would be if your portfolio was spread across different areas.
Can I get a commercial mortgage with no deposit?
Some lenders make it possible to get a commercial mortgage with 100% LTV.
However, it’s important to bear in mind that you’ll have to provide extra security in the form of another property or asset that amounts to or exceeds the required value. Before providing extra security, you should understand that if you're unable to meet your repayments and default on the loan you risk multiple repossessions.
What is a commercial mortgage broker?
Commercial mortgages are complex and regulated. And when it comes to applying for a commercial mortgage, it can be difficult to know where to look, let alone start. Brokers and business finance marketplaces like Funding Options can help business borrowers secure a commercial mortgage that is suited to their needs and circumstances.
Without the help of a broker or marketplace, accessing all the information you need to make key decisions is harder and more time consuming. It’s also possible that you could miss a suitable option if, for example, the lender doesn't rank highly on search engines.
At Funding Options, our Finance Specialists have a lot of experience when it comes to finding the right commercial mortgages for our clients’ needs. To get started, simply tell us what you need and we’ll compare the vast array of commercial lenders on your behalf.