What is a Commercial Mortgage?

A commercial mortgage, often referred to as a business mortgage, is a loan secured against a property, which is either currently being used or is intended to be used purely for business purposes.

Commercial mortgages or remortgages are specifically designed to enable the process of purchasing property or premises for commercial use, to provide the means for expansion of existing premises, and to accommodate all forms of residential, commercial and property development schemes.

As well as providing for the purchase or expansion of business offices, industrial sites and retail outlet accommodation, commercial mortgages or remortgages may also be used to secure a business directly tied to a property, as with a public house, B & B, restaurant or guest-house. In simple terms, commercial mortgages are the recommended resource for financing any business development plan.

Advantages of a Commercial Mortgage

One main advantage of buying commercial premises is the likelihood, in the present commercial market, of the property increasing in value and thereby becoming a positive asset, both as a means of raising further necessary funding or in the event of the owner deciding to sell the property. Another major benefit is that the ownership of the premises will not leave a business open to the risk of higher rental charges or leasehold problems, and will therefore bring a greater sense of security to the business. There may also be potential to sub-let part or parts of the premises, and thereby accrue extra income. And there is also the very great advantage in that the interest part of the repayment of any commercial mortgage or remortgage will be tax-deductible.

Eligibility for a Commercial Mortgage

Anyone requiring funding for a commercial business can apply for a commercial mortgage.

The terms and conditions of commercial mortgages vary from lender to lender. Many will naturally respond more positively towards applicants with a strong credit history, and with a business record that is proven to be stable and profitable. Some may ask for a business plan, with indications of long-term projections. Although some lenders may be prepared to lend 100% of the finance, often they will apply a loan to value ratio on the terms of the loan, and will request an investment by way of a deposit, usually around 10-15%. It may also be a requirement of the lender for the borrower to take up Accident, Sickness and Unemployment Insurance (ASU), as a cover against any exceptional risk.

However, it is no longer the case that only large organisations, with a strong credit history, are eligible for a commercial mortgage, and that, unlike in the past, newer or start-up businesses have still to rely on very expensive short term loans in order to finance their business enterprise. With the growth of successful entrepreneurial businesses throughout the UK, the commercial mortgage market has recognised the need to service these small and medium sized businesses (SMEs) and organisations, in order to maintain their own continued growth. BusinessMortgages.co.uk, with its specialist commercial finance expertise, are now able to negotiate satisfactory deals for most applications.

And, whilst a poor or unproven credit history, including CCJs or SVAs, may have caused considerable risk problems in the past, many of the lenders sourced by BusinessMortgages.co.uk now look beyond circumstances, which may have prevailed in the past, and can and do provide the necessary funding required. In short, it would be worthwhile for anyone seeking commercial finance to make that initial enquiry and apply.

What information will be required?

With any application, the potential borrower may be asked to supply some or all of the following information:

  • Audited accounts pertaining to the last two years
  • Current performance indication
  • Bank statements of the business over the period of the last six months
  • Profiles or CVs on each director or partner of the business
  • Asset and liability statements for each application
  • An overall business plan, indicating profit potential
  • The methodology of how the loan will be repaid

If the commercial mortgage is sourced in order to buy a business and combined property, the borrower may be also be required to give further information on why the business was originally sold. There may also be a requirement to indicate the expected growth of the business, details of any personal investment involved, and the current credit status of the existing business.

Who Do I Approach for a Commercial Mortgage or Loan?

Because each business requirement is different, and because the added legal constraints involved in purchasing commercial property or a commercial property and business combined can be very complex, BusinessMortgages.co.uk recommend that the best available professional advice is sought. With its expertise and specialist knowledge in this type of finance, BusinessMortgages.co.uk will source the entire UK commercial loans market to locate the commercial mortgage deal, which will best suit its customers’ individual needs.

Interest Rates

The interest rate calculated on a commercial mortgage or remortgage will be variable, but, because of the additional risk factor inherent in business mortgages, it is likely to be higher than for a standard homeowner mortgage.

The two main options for repaying the interest will be either variable or fixed.

Variable rates

This is by far the most common option offered by lenders. Variable rates are set to the Bank of England base rate, and will rise or fall in line with any fluctuations of this rate, so it essential that budgeting must take this into account. Typically this rate will calculated at between 1 and 6 per cent higher than the base rate. Although movement in the Bank of England base rate is traditionally quite modest, in times of economic downturn the rate could rise exceptionally.

Fixed rates

The interest rate on a business mortgage will be fixed for a specified period of time, which is usually be between two and five years. Invariably the fixed rate will be slightly higher than the variable rate at he time of agreeing the terms, but there is a guarantee that it will not rise beyond that rate, no matter how the Bank of England base rates fluctuates. This therefore makes budgeting much simpler, and the customer will know exactly how much they will be paying for this fixed period of time.

ypes of Commercial Mortgages available

Generally, the term of a commercial mortgage or remortgage, will be less than the life of a standard 25-year householder mortgage, sometimes as little as 10 years, dependent on the requirement of the borrower and the discretion of the lender.

Although there are variations in the types of business mortgages or remortgages available from lender to lender, usually the method of repayment will fall in two main categories – repayment and interest only.

Repayment Mortgages

Sometimes referred to as a capital and interest mortgage, the repayment mortgage consists of two segments, the capital and interest. The borrower is called upon to repay a part of the overall amount of the loan, as well as the interest accruing each month. At the end of the agreed term of the business mortgage, the loan should be paid off completely.

Interest Only Mortgage

In this type of mortgage, only the interest of the mortgage is paid each month. Usually, a guaranteed pension policy, endowment policy, or some form of authorised insurance, will be required, with the capital amount being paid off at maturity. However, the customer is advised to seek expert guidance before considering this option, as there may be complex legal factors to consider.

Additional Fees & Costs

When making an application for a commercial mortgage or remortgage, borrowers should be aware of the likelihood of incurring some extra costs in order to facilitate all the processes involved. Some of the prime examples of additional fees and costs are detailed below:

Administration Charge

This is a fee charged by the lender in order to cover their costs for undertaking the valuation. This component of the valuation fee may not be refundable, even if the application is withdrawn and the valuation was not completed.

Arrangement Fee

This is a fee charged for initiating the mortgage or loan account, which is usually paid with the application. However, many lenders will allow the fee to be added to the total of the original loan or mortgage. Typically the fee charged will be in the region of 0.5-1.5 per cent of the total loan, but is usually negotiable.

Conveyancing Fee

This is a fee charged by a solicitor or authorised authority for processing the legal documentation involved in the transference of property from the seller to the buyer.

Deposit

This is the percentage of the whole amount required to secure the purchase of a property or premises. The deposit is often around 10% of the total price of the purchase, and in is usually paid in advance prior to the release of the agreed amount of the commercial mortgage or loan.

Early Repayment Charge (ERC)

This is a charge, which may be applied should the commercial mortgage or loan be fully paid before the end of the agreed term, as a compensation to the lender for loss of the full amount of the interest repayable.

Full Structural Survey fee

This may be incurred as a condition of the lender. It is a legally sanctioned complete inspection of a property. Legal action may be taken should the surveyor omit finding a fault, which may later become a serious problem, and the firm employing the surveyor may be liable for the extra costs incurred.

Higher Lending Charge (HLC)

This is a charge, which may be incurred when the commercial mortgage required is for more than 75% of the actual value of the property. The amount of the charge is often referred to as the Loan to Value.

Valuation Fee

This is a fee charged by the lender for the arrangement of a property valuation. The fee is generally required when the original application is made. The fee is usually non refundable, even in the event of a withdrawal of the application.

In Conclusion

Our Business is to Support your Business

BusinessMortgages.co.uk exists to support and encourage all businesses, both large and small, to develop and grow to their maximum potential. Utilising its specialist financial knowledge and commercial expertise, and the most efficient and rapid electronic search technology, BusinessMortgages.co.uk sources the entire UK commercial financial market to negotiate the best possible terms and interest rates available. The process is so simple and straightforward that form-filling and waiting for a decision are reduced to an absolute minimum, allowing the customer to concentrate wholly on the development of their own business.

With so many attractive commercial finance options currently accessible, including business loans and commercial loans, commercial mortgages and commercial loans, standard bridging loans and commercial bridging loans, BusinessMortgages.co.uk is able to offer a unique financial solution, tailored exactly to the unique requirements of each valued customer.

Latest News
Our specialist advisers are here to help you find a commercial mortgage at the lowest possible interest... (read more)
We understand that securing commercial finance from your bank can be a slow and intense process often... (read more)