The time has come: you’re tired of paying an overpriced monthly rent for your business and have decided to buy a property. What now?
If you don’t know where to start, we cover key facts and features to help you navigate the troubled waters of commercial mortgages and decide whether one is the right option for you.
A commercial mortgage is a mortgage for a property that you aren’t planning to use for residential purposes; basically, you aren’t going to live in it.
Applying for a mortgage to buy a property for your business is nothing like buying a house, so be prepared for a series of extra complications. Bear in mind that commercial mortgages aren’t your only option when it comes to arranging premises for your business. For example, if you only need credit for a relatively small sum, you may be able to pull it off with a regular business loan.
There are essentially two kinds of commercial mortgages:
Individual lenders will have their own separate minimum eligibility criteria, but this is the least you can expect to have to qualify for a commercial mortgage.
If your plan is to run a business from the building, lenders will ask to see a business plan. If you’re hoping to lease it to another business owner, the lender will want a financial forecast of the potential returns generated by the property.
Commercial mortgages usually start from £25,000 (or more). It’s often said that commercial mortgages begin where business loans finish, that’s because, while you can get an unsecured business loan up to £25,000 or more if the situation of your business allows it, commercial mortgages are instead secured with the property itself. Depending on your credit score and history, some lenders may require an extra property as security (for example, your house).
If you’ve already started snooping around the Internet for commercial mortgages, you might have found it hard to spot any interest rate at all. That’s because rates can vary significantly depending on the risks that lenders think you and your business carry. You’re going to need to give more information to the lender before getting a quote. This can include details and documents concerning:
Once the lender knows all this, it can make you an offer. Interest rates can be fixed or variable (you may be asked to choose) and there may be different length options available. A fixed interest rate means that you’ll know from the beginning how much you’re going to spend, while a variable interest rate means it will vary according to the Bank of England’s interest rate (which may go up or down).
Commercial mortgages are typically shorter than residential ones. In theory, if you look at lenders’ websites, they usually offer terms between 5 and 25 years for commercial mortgages, with some lenders also open to shorter or longer options (up to 30 years).
In practice, it can really depend on your business. As usual, longer mortgages are more expensive as a whole but mean lower ongoing interest rates and monthly payments, which can give your business a little bit more breathing space.
Banks usually lend up to 70–75% of the value of the property and say that in some cases they can lend more.
As a rule of thumb, you should have at your disposal 25–35% of the value of the property as a deposit. As usual, a higher deposit generally means a lower interest rate, so the more the better.
Besides the interest rate, a commercial mortgage comes with a series of fees that you should take into account when comparing options. These can include:
It’s possible, but don’t expect it to be easy. You must be prepared for higher interest rates and lending from a high street bank may prove impossible. It really depends on your circumstances.
There are lenders that specifically deal with customers with a bad credit history, but comparing their rates and finding a good deal can be difficult. It may be worth seeking the help of a mortgage broker.
If you have a bad credit history, some of the things that can counterbalance it and help you close an acceptable commercial mortgage deal are: a strong credit score and turnover; other properties (or a strong set of other assets, such as equipment and vehicles) that you can use to secure the mortgage; or a considerable debt owed to your business in the form of invoices.
In any case, borrowing money with a bad credit history can be really expensive, so you may want to consider the alternatives carefully before taking this step.
Commercial mortgages are especially difficult to compare because no lender will give you an interest rate quote before knowing your circumstances in and out, which can be a time consuming process if you don’t know where to look.
Mortgage brokers know their way around the market, know which lenders offer deals that better suit your business and can, at the end of the day, save you a lot of money and a lot of stress.
The downside, obviously, is that you will have to add the advisor fee to the list of expenses that a commercial mortgage inevitably generates.
If you decide to seek the help of a broker, make sure it’s part of the National Association of Commercial Finance Brokers and it only charges you if it’s successful in providing you with a commercial mortgage offer. Fees can vary and will often be around 1% of the whole loan.
Think Business Loans
Here is a brief list of things you should think of before starting to compare commercial mortgage options:
If you’re starting to think that a commercial mortgage isn’t what you’re looking for, think about these possible alternatives:
While calculating your eligibility for a commercial mortgage, lenders will consider the complexity of managing the property you’re buying.
The least complex properties tend to be semi-commercial properties, such as a shop or restaurant with a flat above it. You may find it simple to get a mortgage on these properties, even with only a couple of years of buy-to-let management under your belt.
More complex properties, such as large shopping centres, hotels, theme parks or tourist attractions, will be much harder for new investors to be approved for.
If you don’t have years of experience investing in commercial property, don’t panic. There are other ways to boost your odds of being approved for a commercial mortgage.
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