Commercial mortgages explained
A commercial mortgage is a mortgage taken out to facilitate the purchase of or refinance commercial property which is to be owned and occupied by a business for their main trading purpose.
Who are commercial mortgages for?
Commercial mortgages cover a wide variety of different premises, for example, they could be for retail premises on a high street, offices, hotels, care home, manufacturing, industrial or warehousing with office space as well.
Any premises used by a business to facilitate their trading would be considered, other examples could be garages for servicing, MOT’s or crash / accident repairs or car showrooms.
The premises could be a single unit or a client who needs more space might wish to buy 2 or more adjoining units / offices to accommodate their business needs.
Commercial mortgages are assessed differently to residential mortgages. Factors impacting price include condition, alternative use, planning category, intended use, location – and other industry specific criteria.
How does a commercial mortgage work?
A commercial mortgage will vary depending on industry. Generally the mortgage will be on a monthly repayment loan facility, typical terms are 15 or 20 years but longer or shorter time periods can be considered. The loan is repaid from income generated from cashflow by the business. Both fixed and variable interest rate options may be available. The lender will require a first legal charge over the premises and, on occasion, depending on individual circumstances a personal guarantee may be requested from the main directors / shareholders and /or a Debenture.
What are the criteria for a commercial mortgage?
The initial factors to consider are how much cash deposit can the business afford towards the purchase price and what is the source of these funds? The more deposit you can find the lower the risk for the lender and therefore the cheaper the loan may be. The second factor is what sector are you trading in, is it one that is expanding or contracting – is the lender keen to expand their borrowing in this sector and if so what is your profit for the last 3 years. A track record of retained profit (adding back rent if presently renting) will help your application. The lender will calculate the adjusted net profit available to service the monthly loan repayments against their affordability criteria.
Are commercial mortgages interest-only or capital repayment?
Whilst most high street banks will prefer capital and interest payments, albeit they may consider capital repayment holidays. Some lenders will consider interest only options. Mortgage terms may range.
Depending on the borrower’s financial standing; the property and the age of the directors / shareholders – normally until age 75 is acceptable or longer if succession planning is in place. Some lenders will consider to age 85 or interest only but interest only facilities are normally limited to a maximum of 10 years before re-negotiation of the loan, plus there is a premium on the interest rate due to the fact the debt is not reducing, but the value of the asset may decrease. Interest only involves lower monthly payments and generally will free up cash within the business if needed for cashflow, other asset purchases or business expansion
How much can you borrow?
How much you can borrow will depend the total loan to value and overall affordability of the loan. Lenders will generally assess affordability of the debt by reviewing the last 3 years trading accounts. They will also consider personal assets and liabilities and the valuation report regarding condition, value, planning, alternative demand etc
Commercial mortgage rates
There are no standard rates, commercial mortgages are priced individually. The commercial mortgage rate you are likely to receive is dependent on your experience, industry sector and the property itself. Because of this bespoke nature, rates are negotiable rather than set in stone, but they may be higher if the underwriter identifies higher risk in the proposal.
What are the tax implications of commercial mortgages?
Generally, borrowers can offset the interest element on any commercial mortgage as an expense in their profit and loss account, but it is always best to check with your accountant or financial advisor.
Why use a broker to help find a commercial mortgage?
The commercial mortgage market can be a complex one, it’s smart to consider the support of a commercial property finance specialist to help you navigate the market.
Newable Finance are specialist commercial mortgage brokers, with decades of experience working with trading businesses, developers, landlords and investors to secure quick commercial mortgages and mortgages for business.
Our team provides a hassle-free service, and will work with you to find out your bespoke requirements to find the best deal with the most appropriate lender, holding your hand every step of the way.