Commercial mortgages are like standard mortgages, except they are for business premises. They can also be used by people looking to buy a complete, existing business. In this guide, we're going to take a look at the different types of commercial mortgage. We'll also explain some of the processes, and criteria for using this financial service. Let's get started with the basics.
What is a commercial mortgage?
In simple terms, a commercial mortgage is any mortgage that you use for a property that is not your residence. They cover offices, warehouses, factories, and apartment complexes, amongst many others. Commercial mortgages tend to be long-term loans, and can also be used for mixed use properties. A typical example of this would be a shop on the ground floor, with residential premises on the first or second floor.
What types of commercial mortgage are there?
Because of the broad range of uses of properties, there are different types of commercial mortgage. But, in principle, there are two primary loans that you can apply for as a business. There's buy-to-let, for example; or using a building for commercial purposes. Each business proposition will be inspected for risks, and the loan will depend on how high those risks are for the lender.
How long do they last?
Commercial mortgages are often long-term, lasting up to 25 years. However, it is possible to get short-term loans - 3 years is not uncommon, depending on what you want to do with the property. There are also bridging or property development loans, which are commercial mortgages that can last just a few weeks. These types of loans are specifically for property development.
What rates can I expect?
Because every business is different, rates can vary by a significant amount. Lenders look at a lot of different areas when it comes to making their decisions about the risks of every individual business. If your business is in a precarious position, you may not qualify for a loan at all. However, if you have a solid base and the lender feels you will be successful in the future, they may give you an excellent rate.
What security do I need?
Lenders will tend to take the property itself as a guarantee for the loan - but only around 70 percent of the value. The purchasing business will be expected to pay the remainder as a deposit. If you are buying a property as an investment, you may find you will only be able to borrow 65 percent of the sale price. If you are buying the property as an owner occupier, you might be able to find a loan offering 75 percent of the value.
Are there any fees?
Finally, there are plenty of costs to consider with commercial mortgages. You can expect to pay around 1-2 percent of the loan value as an arrangement fee, and around £500 for a valuation. There are legal fees to think about, too - and you might find using a broker helpful, who will also need paying. A typical broker will charge anything up to 1 percent of the value of the property.