Commercial Mortgage Guide

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Commercial Mortgage Guide – all you need to know about a mortgage for business premises or investment, bridging loans and development finance

In this commercial mortgage guide:

What is property investing and why would I want to do it?

In its simplest terms, investing means setting aside money that you do not need to spend right now.  Using that money to buy houses, flats, land, offices or other types of building, is investing in property.

Investing in commercial property (buildings or land to be used for your or other people’s business) has, in the past, consistently provided good returns to the investor (that is, you are likely to make money on your investment either by selling on a property which is worth more than when you bought it, or renting it out to other people for a fee.

There are many advantages to owning your own commercial premises including tax-deductible interest rates and greater flexibility.

What should you consider before investing in commercial property?

Investing in commercial property is a big decision.  Before you commit, you should think about some important issues:

  • Have you cleared your debts?

The state of your personal finances will impact a lender’s decision to agree a mortgage even when it’s not for the property you’re going to live in

  • Do you have adequate emergency funds available?

You should have a ‘war chest’ saved to be able to pay for any unforeseen bills or last-minute repairs.

  • Are you protected?

You need to take into account possible loss of earnings due to sickness or accidents.

  • Have you assessed the risk you are taking?

When investing in commercial property you must carefully determine the level of risk that is present.  For example, if you hope to get a commercial mortgage for a mixed-use property (say, a shop with flats above it), you cannot rely on all your flats being occupied all the time.  You need to include the risk of late payers and other debts that can occur should you have unscrupulous tenants.

Here at Mortgage Style we can help you mitigate your risks by finding you the right mortgage and our experienced, knowledgeable team who are based in and around the Bristol area can also advise on your property’s location, size and other factors.

What is a commercial mortgage?

A mortgage is a loan secured against property.  Many people take out a mortgage to buy the home they live in.  These are called residential mortgages.

Sometimes referred to as a business mortgage, commercial mortgages are secured against property that you don’t live in.  That might be for your own business premises or land (called an “owner occupier mortgage”), or a workspace you’ll rent to another business (usually referred to as a “commercial investment mortgage”).

Why or when might you need a commercial mortgage?

Commercial mortgages are designed for companies and individuals who want to remortgage or purchase a property that will be for business use for example the purchase of office or factory space.

They can also be used where the property has ‘mixed use’, for example, when a building has a shop on the ground floor but a residential flat above it.

A commercial mortgage would be suitable in the following situations:

  • You have bought a property with the intention of changing it into a buy-to-let
  • You need short term bridging finance for a wide range of reasons
  • You’re in need of development finance for your business or a building project

How do the rates for commercial mortgages differ from residential mortgages?

Rates for commercial mortgages are often higher than those for residential mortgages because lenders have a more difficult job assessing the loan when it comes to businesses.

There are more variable factors at play for example the type of industry or sector your business operates in.  Performance and business track record are harder to understand than reviewing personal incomes from salaries for a residential mortgage.

Valuing the property and understanding the transaction can be more complicated too and usually involve a land registry search to make sure the property details match the title deeds.

What types of commercial mortgages are available?

You can get a commercial mortgage on many of the same terms as a residential mortgage:

  • Interest only or repayment

Pay just the interest each month or some interest and part of the loan balance every time you make a repayment.

  • Variable and fixed-rate

Rates can be fixed so you know what you’ll pay each month or you can secure tracker deals which follow the Bank of England base rate.

Bridging loans and their commercial use

Bridging loans are short term finance solutions providing a quick injection of capital when it’s needed in a range of scenarios.

They were originally created to provide a buyer with the funds needed to complete on a house purchase while still waiting for the sale of their current home to go through (to ‘bridge’ the gap between selling and buying property), but they’re being used for a growing number of reasons, particularly by property investors looking to capitalise on a fleeting opportunity.

A bridging loan could be useful in a commercial context if the property being purchased is not for the buyer to live in.   They could be ideal if you need a speedy and flexible solution.

There’s more information on our “Guide to Bridging Loans” here or you can head over to our sister website, Brunel Bridging.

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How much can I borrow using a commercial mortgage?

It’s difficult to give a set figure as each case will vary depending on what you’re trying to achieve, past performance and potential risks but we may be able to secure a loan to property value of up to 80%.

What will a commercial mortgage broker do for me?  Why should I use one?

Commercial mortgages are complex and tailored specifically to the business or individual who is borrowing.  No lender can understand your unique business idea or situation by using an online form so they employ lengthy review and assessment processes to establish whether they will lend in each situation – a process which isn’t usually well documented and very hard to prepare for.

Here’s how we can help you get a commercial mortgage:

  1. Expert local knowledge

First things first, before you decide to invest in a property, our mortgage advisors can offer tips and practical advice about the location, size and type of property you’re buying.

Many of our advisors are landlords in the South West themselves and lots of our clients are property developers so we have a broad range of experience to call upon.

We even have a loan comparison tool on our sister website, Brunel Bridging, which includes a quick way to understand the potential returns of any given property investment.

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  1. Simplification, clarification and understanding

We’ve been through the commercial mortgage application process many times and can explain the nuances of each lender so you’re clear on what you need to do and what will happen.

Our experience and connections mean that, once we understand your business and objectives, we can quickly search for the right products with criteria we know you’ll meet, saving you hours of research and frustration.

  1. Exclusive access to deals

As an impartial broker, we’re not tied to a particular lender and can find you the right product from a comprehensive range available.  We even have access to deals not available directly to borrowers so it’s always worth running your situation by us.

  1. Application support including successful presentation of key information

We’ll guide you through the mortgage application process step-by-step and we’ll make sure your application is viewed positively by the lender.  We’ll help you collate and present the required information which can include some or all of the following:

    • A full business plan and how you intend to repay the loan
    • Current business key performance indications (KPIs)
    • A profit and loss forecast for the next 12 months
    • Business bank statements for the previous 6 months
    • Audited accounts for the last 2 years
    • Asset and liability statements for each applicant
    • Profiles of each partner or director of your business

What fees are involved in commercial mortgages and property investing?

You’ll have to pay fees to take out a commercial mortgage.  Here’s a summary of what you can expect to pay for:

  • Lender arrangement fee

This is payable to the mortgage lender and can be added to the loan or deducted upon completion.

  • Valuation

The valuation fee for a commercial or business mortgage will be larger than on a residential mortgage as the valuation itself will be more complex.  It is normally paid on submission of your application.

  • Legal fees

Also often higher than residential mortgages given the complex covenants and titles involved.

  • Broker fee

We charge a fee for our service but won’t pay anything unless you agree to go ahead with our advice.

What about mortgages or finance for development projects?

Property development finance was once extremely hard to come by but is now more accessible as the UK tries to tackle its housing shortage.

Whether you’re an experienced builder looking to fund a large residential development or an individual planning a small self-build project, we can access a comprehensive range of deals, some of which aren’t available on the high street.

Get in touch today

We hope this guide has been helpful and you now know more about commercial mortgages.  Contact our friendly team to talk more about your specific circumstances and what you’d like to achieve.

Call us on 0117 907 0818 or email contact@mortgage-style.co.uk

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

There may be a fee for mortgage advice