Updated 21 June 2022
Commercial mortgages have their own rule book. With so many different ownership possibilities to cover and a different risk structure, this is a mortgage type that varies a great deal depending on your business’s circumstances.
If you’re considering buying a commercial property with a mortgage, here’s what you need to know.
You will definitely need a commercial mortgage to buy any purely commercial property, such as an office, a shop or a restaurant. However, the list doesn’t end there. You could be looking to buy a mixed-use property, like a pub with a flat or house above. Other buildings might be residential but have business space attached, such as B&Bs, kennels and catteries, home-based beauty clinics and nurseries. Even if you’re looking to own a purely residential property but want to rent it out, you will need a specialised commercial mortgage, a buy-to-let mortgage.
Almost any property that generates income is likely to need a commercial mortgage. The exception is your own home if you rent out a room, for example – but if you’re renting out several rooms then talk to your mortgage lender to ensure your current mortgage is still appropriate.
Businesses and their needs are so varied that commercial mortgages need to be bespoke rather than off-the-peg. Commercial lending is also considered to be higher risk, which affects everything from the amount you can borrow to the mortgage term and interest rates. The application process is also more detailed and will place your business under real scrutiny. You should therefore definitely seek the advice of a mortgage broker, and also ensure you have a good accountant to help strengthen your application.
A commercial mortgage generally requires a larger deposit (as a percentage of the property’s value). Unlike a residential mortgage, which might let you borrow up to 95 per cent of the home’s value, a commercial mortgage will only cover around 65 to 75 per cent of the property value. You will have to find the rest of the money for a deposit. However, bear in mind that commercial property tends to be significantly cheaper, so the actual deposit size may still be less than when you buy a home.
A commercial mortgage usually has a shorter term than a residential loan. They can be as short as one year and as long as 25 years, though many are capped at 15 years. A shorter mortgage term can limit the amount you can borrow, but this can also be an advantage if you’re in a position to pay if off quickly.
Your application for a commercial mortgages is based on the cash flow and long-term security of your business, among other factors. Each lender has its own risk profile will set its own conditions for your business to meet. Therefore, don’t despair if one lender turns you down, as the next one may lend under very different guidelines that you are better able to meet.
Overall, the application process for commercial mortgages is far less black-and-white than it is for residential loans. However, the same rule of thumb applies: the stronger your application, the better deal you are likely to get.
Most commercial mortgages are on a variable rate determined by the Bank of England, though there are a few fixed rates to be found if you search. In general, the rate you are offered will be determined entirely by the strength (or weakness) of your application, and the lending risk you are seen to present. If you’re a low-risk prospect borrowing a large amount, you are most likely to get offered the better rates.