What is a commercial mortgage?
Commercial mortgages, sometimes referred to as business mortgages, are mainly for business owners who are looking to buy property or land for commercial use.
It’s a familiar process for many businesses that have successfully grown, and who are setting up a new work space or looking to expand beyond their existing business property. It can often be the right course of action for business owners who are looking to avoid increasing rents, or maintenance and management fees.
The main difference between a commercial mortgage and a residential mortgage is that the value of the land or property is usually much larger. Also, because of the sheer variation of land and premises, commercial mortgages tend not to be pre-set products in the same way that residential mortgages are, although they do stick to the pan-European Mortgage Credit Directive, which covers both residential and commercial mortgages.
As a commercial mortgage is any loan secured on property which is not your residence, buy to let mortgages are a special type of commercial mortgage as well. If you’re planning on buying a property to rent out for extra income, you’ll need a commercial mortgage.
How can I get a commercial mortgage?
There are many different options available, depending on your lender. Finding a commercial mortgage can take a bit of time and detailed research, but you should find a lender that meets your particular needs. A mortgage broker can help at this stage.
Before you start your search, remember that you’ll need certain documents in order to apply successfully. Check that you have:
- Recent bank, liability and asset statements records
- Performance figures (both current and projected)
- The details of your partners and directors
- Tax returns (for a period of at least three years)
What are commercial mortgage terms?
Terms can vary. Some repayment plans have three-year terms, while others may offer a term of 25 years; the average is around 15 years.
Terms are often dictated by the size of and value of the property, or the available deposit you have, with many lenders offering commercial mortgages at a variable rate.
You’ll need to watch out for complex clauses or directives where there are greater risks to the borrower – if you have any doubts or you’re unsure of the contract wording, your mortgage broker will be able to help.
How much is a deposit for a commercial mortgage?
Deposits can vary, but commercial mortgage deposits tend to be around 30% of the property’s value.
The type of business you run can also affect your deposit. Some lenders may ask for more money if they consider your business to be more ‘high risk’ – for example, if it’s a restaurant or a bar.
What is a part-commercial mortgage?
A part-commercial mortgage is a mortgage for a property that is half business and half residential, such as a flat above a shop or pub, or part-converted offices and flats. These types of properties often fall outside standard residential or commercial mortgage lender terms, so they need a unique mortgage product.
Rates vary, but lenders tend to favour applicants who have experience in running or letting commercial properties. People who have owned more than one buy to let property for a minimum of two years also tend to be given good deals.
Commercial mortgage FAQs:
- Can I get a commercial mortgage on a leasehold property?
- Yes, but there usually has to be at least 70 years left on the lease.
- Can I switch from a residential mortgage to a commercial mortgage without a penalty?
- This would be a decision that your current, residential mortgage lender would make. If they say no, then you might have to consider paying off the residential mortgage first, which may incur a penalty. You may then be able to apply for a commercial mortgage.
- Are there any limits to the kind of business I can run?
- A commercial mortgage can be offered for most legal businesses. Businesses which might seem like a poor investment may struggle to get a commercial mortgage.
- What other fees come with a commercial mortgage?
When applying for a commercial mortgage, you need to consider the cost of:
- Legal costs, including surveys and insurance
- Loan arrangement fees
- Valuation fees
This information is offered as a guide - a mortgage broker can give more detailed advice before taking out a commercial mortgage.
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