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Commercial Mortgages Explained

A commercial mortgage is a specific type of loan secured against non-residential properties, catering to a diverse range of needs, such as purchasing or refinancing trading business premises, commercial buy-to-let properties, mixed-use properties, and even land. This article will delve into the fundamentals of commercial mortgages, discussing eligibility criteria, benefits, types, costs, and considerations for borrowers.

What is a Commercial Mortgage?

A commercial mortgage is a loan secured against a property classified as non-residential. This can include various property types, such as full commercial buildings, mixed-use properties, and even land. Unlike many financial products that rely on automated scoring, commercial mortgage lenders often take an individualized approach to assess risk, offering more flexibility in their criteria evaluations.

Eligibility for Commercial Mortgages

Commercial mortgages are accessible to a wide range of individuals and entities, including property investors, business owners, sole traders, partnerships, LLPs, Ltd companies, and even overseas applicants. The key requirement is to have a deposit and suitable security. The application process involves thorough scrutiny to ensure compliance with specified conditions.

Key Benefits of Commercial Mortgages

  1. Tax Deductibility: Interest paid on commercial mortgages is tax-deductible, offering a financial advantage to borrowers.
  2. Flexibility: With the emergence of challenger banks like YBS Commercial, Aldermore Bank, and Shawbrook Bank, commercial mortgage lending has become more flexible compared to previous years.
  3. Property Value Appreciation: Investing in business properties through commercial mortgages can result in value appreciation, potentially yielding higher returns compared to residential properties.
  4. Higher Yields: Commercial properties often generate higher rental yields than residential properties, making them attractive for investment purposes.
  5. Long-Term Borrowing: Commercial mortgages allow borrowers to extend their repayment terms, ranging up to 25 years, providing cost savings compared to short-term financing options like bridging loans.
  6. Capital Repayment Holidays: Some lenders offer the flexibility of taking capital repayment holidays in the early years of the mortgage, providing additional financial maneuverability.

Disadvantages of Commercial Mortgages

  1. Regulation: In most cases, commercial mortgages are not regulated by the Financial Conduct Authority (FCA), potentially exposing borrowers to fewer consumer protection measures.
  2. Repossession Risk: Failure to keep up with mortgage repayments can lead to property repossession, similar to residential mortgages.
  3. Lower Loan to Value (LTV): The maximum LTV offered for commercial mortgages is generally lower than that of residential mortgages.
  4. Set-Up Costs: Borrowers are required to cover various set-up costs, including lender arrangement fees, broker fees, valuation fees, legal fees, and acquisition costs.

Key Features of Commercial Property Mortgages

Commercial mortgage offerings can vary, but some key features include:

  • Max LTV: Up to 80%
  • Interest Rate: From 2.25% over the Base Rate
  • Repayment Type: Capital repayment, interest-only, or part and part
  • Term: 5-30 years
  • Interest Type: Fixed or variable available
  • Acceptable Security: Any commercial or semi-commercial property considered, with land accepted on a case-by-case basis
  • Criteria: Loans from £25,000 with no maximum loan size; available to various entities including individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals, and pension funds; adverse credit accepted on a case-by-case basis; products with no early repayment charges available.

Types of Commercial Mortgages

Commercial mortgages can be categorized into different types:

  1. Owner-Occupied Commercial Mortgages: Used when a property is purchased for the buyer’s own business to operate from.
  2. Commercial Investment Mortgages: Applied when a commercial property is leased to another business for their operations, akin to a buy-to-let mortgage for non-residential property.
  3. Interest-Only Commercial Mortgages: Allows paying only the interest monthly, resulting in lower monthly payments but higher total interest charges over the term.
  4. Capital Repayment Commercial Mortgages: Involves paying both the capital balance and interest each month to gradually repay the mortgage over the loan term.
  5. Fixed Rate Commercial Mortgages: Maintain a fixed interest rate for a specified period, offering consistent monthly repayments.
  6. Variable Rate Commercial Mortgages: Interest rates fluctuate based on market changes, leading to potential variations in monthly repayments.

Determining Loan Amounts and Affordability

The maximum loan amount is determined by the loan-to-value (LTV) ratio and the borrower’s position within the lender’s affordability rules. While the maximum LTV is typically 80%, it can vary based on the sector and health of the industry. Lenders assess affordability based on factors like EBITDA (earnings before interest, tax, depreciation, and amortization) for owner-occupied mortgages and rental cover for commercial investment mortgages.

Costs Associated with Commercial Mortgages

The primary costs associated with commercial mortgages include interest charges, set-up costs, and acquisition costs (for property purchases). Interest rates vary, with owner-occupied rates starting at 2.25% over the Base Rate, and commercial investment rates slightly higher, ranging from 2.8% to 7.5% over the Base Rate. Set-up costs encompass lender arrangement fees, broker fees, valuation fees, and legal fees. Acquisition costs involve Stamp Duty and potentially VAT, which can often be reclaimed after purchase.

Where to Get a Commercial Mortgage

Commercial mortgages can be obtained through various channels, including brokers, high street banks, challenger banks, and specialist commercial mortgage brokers such as MortgageTek . Working with a broker offers advantages in terms of managing the application process, comparing options, and navigating intangible factors. High street banks generally offer lower rates but have strict criteria, while challenger banks provide more flexibility with slightly higher rates. Specialist lenders offer the most relaxed criteria but at the cost of higher interest rates.

How to Get Your Application Approved

Submitting a well-prepared application enhances the likelihood of approval. Required documents typically include a completed application form, assets and liability summary, business bank account statements (for owner-occupied applications), trading accounts (for owner-occupied applications), and leases and tenancy agreements (for commercial buy-to-let applications). Quick compliance with lender requests and effective communication can expedite the approval process.

FAQs

Common questions regarding commercial mortgages include:

  1. Savings on Monthly Finance Costs: Some lenders allow interest-only repayment, providing an opportunity to save on monthly costs.
  2. Remortgaging to Repay Loans: Commercial mortgage lenders may permit the repayment of unsecured debts during remortgaging.
  3. Comparison to Bridging Loans: Commercial mortgages, being long-term, offer cost savings compared to short-term bridging loans.
  4. Alternatives to Commercial Mortgages: Alternatives include bridging loans, residential mortgages, and secured business loans, each serving specific needs.

In conclusion, understanding the nuances of commercial mortgages is crucial for prospective borrowers. Whether acquiring property for business operations or investment purposes, the variety of options and considerations necessitate careful evaluation to make informed decisions. Working with experienced brokers can streamline the process, ensuring optimal outcomes for borrowers seeking financial solutions for their commercial property ventures.