Commercial Mortgages: How they Work

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If you’re looking to buy a property for your business to occupy, then a commercial mortgage might be right for you. 

At Barlow Irvin, we have years of experience helping businesses to secure a commercial mortgage, compare interest rates and navigate applications to lenders. 

Key Points:

  • Commercial mortgages are much more complex than residential mortgages and so will require the assistance of a mortgage broker
  • There are two main types of commercial mortgages to choose from
  • You may need to use a personal guarantee if your business has not been trading for long enough

What is a commercial mortgage?

A commercial mortgage, also known as a business mortgage, is a loan which is secured on any property used for business purposes, not including any residential property. 

In simple terms, commercial mortgages are aimed at business owners who wish to buy property or land for business purposes. 

What fees come with a commercial mortgage?

When you get a commercial mortgage, there are a few fees you must pay:

  • Arrangement fees – These fees are typically added to the loan after it is approved. However, some lenders may request an arrangement fee early on to cover their work in case you don’t accept their offer. Arrangement fees are usually 1-2% of the loan amount for up to £1 million.
  • Legal fees – You’ll need to pay both your legal fees and the lenders, which can start at around £500 per party.
  • Valuation fees – A valuer will visit the property you wish to buy and write a report to the lender. Valuations can start at around £500 for a straightforward case and the fees are based on an individual quotation.
  • Broker fees – Your broker will give you specific advice in regards to your situation.

What are the different types of commercial mortgages?

Commercial mortgages can be divided into two categories:

  • Owner-occupier mortgages –  These are used to buy property that will be used as a trading premises for your business.

Commercial buy-to-let mortgages – If your business is planning to rent out a property to another business, you should consider taking out a buy-to-let mortgage. They are also called a commercial investment mortgage.

What to consider before applying for a commercial mortgage

Commercial mortgages can be quite complex, so it’s a good idea to carefully consider which mortgage to opt for. There are a few factors you will want to keep in mind, such as:

  • Bad credit ratings – You will usually still be able to apply for a commercial mortgage if you have bad credit history, but you will likely pay higher interests to make up for the risk a lender will have to take.
  • Affordability checks – Deposits for this kind of mortgage can be quite large, so it’s a good idea to ensure you’ll be able to pay both the deposit and the monthly repayments.
  • Loan to Value Ratio – A broker can often help you find the highest loan to value ratio.
  • Personal Guarantees – If you haven’t been trading long, lenders may see you as a high risk borrower and therefore request personal guarantees. 

What is the criteria for a commercial mortgage?

In order to qualify for a commercial mortgage, you will need to pass the lenders eligibility checks. These usually include:

  • Your business’s cash flow and any debts you may owe to assess the financial health of your company 
  • Your business’s projected income to establish whether you can cover the costs of the loan 
  • Your ability to pay the deposit 
  • Rental income may be taken into account 
  • General income, assets and credit 

How to choose the right commercial mortgage

Enlisting the help of a mortgage broker is one of the easiest ways to choose the right commercial mortgage for you. 

At Barlow Irvin, we will take the time to understand the specific needs of you and your business, helping you to achieve your mortgage goals. We will look at rates from high-street lenders, as well as niche lenders too, so you can be assured that every option is considered before you start signing anything.

FAQs about Commercial Mortgages

Can you get a residential mortgage on commercial property?

No, you cannot take out a residential mortgage on a commercial property since this type of property is designed for business use. 

Since a commercial property is higher risk than a home, it has tailored rates to reflect that and differ to those of residential mortgages. 

How do commercial mortgage interest rates work?

Most commercial mortgages are paid on a variable rate and in residential terms, they would be referred to as tracker mortgages

Unlike most personal loans, the rates charged for commercial mortgages are not determined from the offset. Lenders also usually have a risk profile that they adhere to, so if your loan falls outside of their risk profile, it will likely be refused.

Can you get a commercial mortgage on a leasehold property?

Yes, you can get a commercial mortgage on a leasehold property as long as there is more than 40 years remaining on the lease. 

Should you use a mortgage broker to get a commercial mortgage?

The complex nature of a commercial mortgage means that the help of a mortgage broker is invaluable. At Barlow Irvin, we have years of experience helping our clients to achieve their property goals, including both residential and commercial properties. 
To find out more about how we can help you find the right commercial property for you, get in touch with us today and we’ll find the best rates for you.

About the author 

The Barlow Irvin Team

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