If you're looking to expand your business or have found that the cost of renting has become too high, then a commercial mortgage could be the solution that you're after. Commercial mortgages are used for buying or refinancing any land or property for commercial use. Just like a regular residential mortgage, money is borrowed and secured against a property. They can also be used for commercial property development, or to expand an existing business. Read on to find out whether a commercial mortgage is right for your business.
In this guide:
How are commercial mortgages arranged?
Commercial mortgages are made to suit both lender and borrower - the lender must have security on their loan, and the borrower wants to benefit through reduced repayments compared to renting.
A commercial mortgage is much more valuable than a residential one, and not just because it provides vital cash to purchase business premises. A commercial mortgage extends finance in several ways:
- Buying business premises
- Securing land development ventures
- Developing an owner-occupied business.
- Adding to a buy-to-let portfolio.
Commercial mortgages are often long-term, and frequently last up to 25 years. Your mortgage lender would typically lend you up to 70% of the property's value, which leaves your business to pay back the mortgage in regular instalments and utilise working capital to fund growth.
As most commercial mortgages usually won't offer more than 70% of the property's value, your business must find the rest of the cash to complete the purchase. This can often be quite a hefty sum.
What are the benefits of a commercial mortgage?
Commercial mortgages are being increasingly seen as a viable source of business funding and can do much more than simply giving you a place in which to operate. Owning your own premises means that you're in a more secure position, as you are no longer exposed to increasing rental charges. Taking out a commercial mortgage can future-proof your business, by allowing you to access equity when property prices gradually increase.
Here are just a few benefits to taking out a commercial mortgage:
- You release capital which can be used for investment and growth
- You are free to consolidate business debts
- You have more money free to buy new equipment
- Your business can expand its trading
- It's cheaper than renting
- You may also have the option to sublet parts of your property to bring in additional income
As a business owner, you can use a commercial mortgage to purchase a business property for a number of reasons - for your own use, to rent out, for purchasing a company, or unlocking equity within buildings you already own.
How do you apply for a commercial mortgage?
There are plenty of lenders that offer commercial mortgages, so ensuring that you choose the right one for you is really important. Interest rates can vary significantly, as can commercial speciality. While some lenders only offer mortgages to business who have plenty of asset security, some prefer to lend to owner-businesses, or exclusively fund land developments.
As a potential borrower, you are subject to some financial checks. These normally include:
- Three years of accounts, or tax returns
- Current and projected performance figures
- Bank statements
- Details and profiles of every director and partner in your business
- Asset and liability statements.
Your credit history will also play a big part in whether or not you will be approved for a commercial mortgage. But the other financial checks mean that your credit history won't be your lender's single focus.
Rates and Repayment
Interest rates are usually higher for commercial mortgages than they are for residential mortgages, as the lending is seen as higher risk. It's likely that you'll be asked to offer a greater deposit of around 30%.
Variable interest rates are set against the Bank of England's base rates and depend on the set rate at the time when you take out your mortgage. Fixed rates are set for a certain period, often up to five years. Fixed rates offer guaranteed repayments, which you can then calculate into business projections.
The loan term can vary from as little as 5 years to as much as 40 years. It's a huge financial commitment, so it's important to understand what you want from your commercial mortgage and what your mortgage lender wants from you.
How you choose to use your property will impact on the amount that you can borrow, and the interest rate that you'll be offered. For example, if you choose to buy an office block for your business and later re-develop and sublet part of the space, then your commercial mortgage would change from being an owner-occupied business to an investment business. This would probably cause your loan to value ratio (LTV) to decrease.
Despite this drop, renting out your property is a very viable option if you want to maximise your premises' earning potential and offset the cost of your mortgage repayments.
Can I get a commercial mortgage as a start-up business?
As a start-up business, you would naturally have little or no trading history. Therefore, you'll find yourself needing a much lower LTV ratio.
In the case of many start-up businesses, it's evident to lenders that many start-ups are asset rich but cash poor. If this applies to your business, then they will likely accept security from an existing property (such as your own residential property). Most lenders are accepting of an arrangement like this and you would have space to negotiate further down the line, when equity levels have been reached.
Securing a commercial mortgage can help with the future financing of your business - if your property's value increases, so does your business capital. When equity rises, you can use it to provide further funding for growth and expansion.
How does refinancing work?
Remortgaging a property that your business already owns can be a very useful funding option. Refinancing a commercial mortgage means that you pay off one mortgage to replace it with another. This is normally done to secure a better interest rate, which frees up more cash for your business.
You can refinance your mortgage if your business owns or part owns a property. Because of the unique way in which commercial properties are set up, when you refinance the terms of your mortgage, negotiations can be supported with newer finance and valuation figures.
If you can show that your business' credit history has improved, your lender will likely have more faith in your ability to make repayments. This further increases the likelihood of you getting a better rate.