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A commercial mortgage is a loan which is secured against a property that is not your own home. This may be commercial properties such as a retail premises or a buy to let property or a combination of both.
If your business needs to borrow an amount larger than £25k, a commercial mortgage can help you. £25,000 is the maximum business loan that you can get. A business loan, however, is unsecured.
There are two main reasons that you may need to take out a commercial mortgage. If you want to purchase a new property, either for operational business use or to let out for rental profit.
Otherwise, you might want to release the equity in your current business property in order to pay for additional high cost business needs.
The amount that you can borrow for commercial purposes is determined by what the loan is intended for. If the property is for your personal business use, you can usually borrow between 70% and 75% of the property value. If you plan to purchase a property as an investment, for example to let to another business, the loan amount is determined by the potential rental profit. This will be a maximum of 65% of the property value. If you are borrowing against your existing property to release the equity in order to purchase another business or stock, the percentage will be lower. This will also vary by lender and the amount of equity available.
There are two types of commercial mortgage. You would use an owner-occupier mortgage to purchase the trading premises for your business. A commercial investment mortgage is used to purchase an existing property or property development that you plan to let out to another business owner.
It’s unusual for a commercial mortgage to be fixed rate. This is due to the higher risk nature of commercial lending. The majority of commercial mortgages use variable rates similar to those of a tracker mortgage in residential terms. For example the Bank of England base rate plus the lender’s percentage. This percentage varies from lender to lender.
Some lenders offer commercial mortgages with fixed rates of between one and ten years for loans up to a maximum £500,000. These are subject to early repayment fees and breakage costs, should you wish to cancel the loan or pay it off early.
For both fixed and variable rates the interest rates tend to be higher than a standard loan or mortgage, in line with the higher risk to the lender. It is worth considering, however, that the rates are still likely to be lower than a standard business loan. This is because a commercial mortgage is secured on the property, so presents lower risk to the lender.
The application process is similar to that of a residential mortgage. You will need to prove affordability and provide evidence of your income and expenditure for the lender. It’s wise to prepare the following documents prior to your application.
The interest on a commercial mortgage is tax deductible. In some cases this will benefit a landlord over a buy to let mortgage, whereby the tax is no longer deductible on interest payments.
It’s worth bearing in mind that as well as higher interest rate, the deposit requirements can be quite high for commercial mortgages. Commercial mortgages are also secured on the business premises. This means that if you do not keep up your repayments the property can be repossessed.
You will usually still be able to obtain a commercial mortgage if you have bad credit, however, the interest rate will reflect this. If you have a short trading history, however, the lender will likely require additional guarantees.
A mortgage broker can help you to secure the best rates available to you and help you to find the most suitable commercial mortgage for your circumstances. A commercial mortgage is generally more complicated than a standard residential mortgage and as such, having an experienced broker to guide you through the process is advisable.
FCA disclaimer
Based on our research, the content contained on this website is accurate as of most recent time of writing. Lending criteria and policies may change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information.
The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage / financial advice and work only for firms who are authorised and regulated by the Financial Conduct Authority.
They will offer any advice specific to you and your needs. Some types of buy to let, commercial, bridging, mortgages are not regulated by the FCA.
Please think carefully before securing other debts against your home or releasing equity from a property you own. As a mortgage is generally secured against your home or your investment property, it may be repossessed if you do not keep up with repayments on your mortgage.
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