For the first time commercial property buyer, commercial mortgages can be difficult to comprehend, especially in such a large and mixed market. Commercial mortgages can be used for different things and the cost, interest and application process can vary. In this article, we will lay out everything you need to know, in an easy-to-understand manner – no complex information or technical financial talk, just straight-forward advice.
What exactly is a commercial mortgage?
A commercial mortgage is a long-term loan used to secure a commercial property, such as an office building, retail space, warehouse, and even agricultural land. The commercial mortgage, as with residential mortgages, is typically used to purchase or re-finance the chosen property.
Commercial mortgages are also often used to secure residential properties that are used for business purposes. For example, a country home may be used as a bed and breakfast or an apartment building may be purchased by a property company for letting.
What is a commercial mortgage used for?
Commercial mortgages are typically used for either purchasing a commercial premise or to fund a commercial investment property. Business owners may also look to re-mortgage their commercial property, with reasons varying from getting a better interest rate or changing the monthly payments to realising any equity from the property.
If you are unsure of what property equity is, please read the following article from Money Saving Expert: https://www.moneysavingexpert.com/mortgages/equity-release/
How long does a commercial mortgage last?
Generally, the length of a commercial mortgage repayment period will range from 3 to 25 years. For those looking for a shorter term loan, there is the option of a bridging loan or property development loan. These shorter-term loans will have variable repayment periods, with anything from a few weeks to 24 months.
How much can I borrow?
If your commercial property is owner occupied then you will be permitted to borrow 70-75% of the property price. If you are purchasing a property for investment then it will depend on rental income that you will generate, but you will usually find that the amount you can borrow will not exceed 65% of the property price.
What are the typical interest rates?
The interest rates of a commercial mortgage can vary due to a range of factors. The rates are typically around 2.5% – 7.5% per annum. If your application is low-risk you will obtain a lower rate – for larger loans, low-risk applications are usually given to well-established businesses or experienced individuals.
The majority of commercial mortgages are written on variable rates linked to the Bank of England or LIBOR and a fixed rate can be offered by most lenders. On top of the interest you are charged, there will be a number of fees you are required to pay when arranging your commercial mortgage.
How do I apply for a commercial mortgage?
This is an area that differs greatly from residential mortgages. Commercial mortgages are usually manually assessed and the majority of lenders will have set criteria that they are guided by – where reasonable, there is scope for discretion.
Should I use a broker?
It makes sense to use a broker. The commercial mortgage market is vast and finding the right option for you can be difficult. A lot of people tend to jump into the first option they find or are accepted for, without looking at better options that may be available to them.
A broker will listen to all of your needs and use their expert experience and connections to source a range of mortgage options for you to choose from.
What if I have been unaccepted for a commercial mortgage?
If you have not been accepted for a commercial mortgage on your ideal commercial property, there is no need to worry. IAP Consultancy can introduce you to our commercial property partner who will purchase the premises and then lease it back to you.
There is a range of scenarios this can be utilised that we would be more than happy to discuss in further detail – call us on 07956 499419.