Commercial and semi-commercial mortgages

This guide covers what you need to know about commercial mortgages.

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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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.

What is a commercial mortgage?

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:

  • Owner-occupier mortgage. If you’re planning to use the property yourself, for your own business. It can be used for a wide range of property types, such as shops, restaurants, warehouses and so on. It also concerns hybrid solutions that are both residential and commercial, such as buying a shop with a private flat above it. Lenders usually consider it more risky than buy-to-let, so interest rates tend to be higher.
  • Buy-to-let mortgage. When buying a property as an investment, with the intention of letting it out. Buy-to-let can be residential (if you buy a house with the purpose of letting it to someone who will live in it) or commercial (after buying it, you let the property to a business). Buy-to-let mortgages are usually cheaper than owner-occupier ones (with commercial buy-to-let being considered a bit riskier than residential buy-to-let).

Am I eligible for a commercial mortgage?

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.

  • You have a deposit worth at least for 25% of the property
  • You’re a homeowner
  • You have at least two years of experience owning buy-to-let or commercial property

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.

How does a commercial mortgage work?

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:

  • You. You’ll need to provide proof of identity and address, income, bank statements and details of other properties you own.
  • Your business. The lender will need to see assets, liabilities, income and expenditure, bank statements, financial accounts and sometimes a projection.
  • The property. How much does it cost? What are the sales agent’s details? If you’re looking at a commercial buy-to-let, you may also need details of the tenant.

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).

How many years do commercial mortgages typically last?

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.

What is the typical deposit and LTV possible for a commercial mortgage?

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.

Additional fees of a commercial mortgage

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:

  • Arrangement fee. It’s usually added to your loan and can be around 1–2% of the whole sum.
  • Commitment fee. Some lenders will ask for part of the arrangement fee once you accept the offer, to cover the cost of their work.
  • Legal fees. You’ll be expected to cover both your own and those of the lender. Given the complexity of commercial mortgages, they’ll be higher than those for a personal mortgage.
  • Valuation fees. The cost for the property you are buying (and securing) to be evaluated.
  • Early repayment fees. If you want to repay the mortgage early and get rid of the debt, be aware that you will probably incur a significant early repayment fee.

Can I get a commercial mortgage with bad credit?

It’s theoretically 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.

Should I use a broker to get a commercial mortgage?

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 is 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.

Key features of a commercial mortgage

Here is a brief list of things you should think of before starting to compare commercial mortgage options:

  • Deposit and LTV. The deposit will be much higher than for a residential mortgage. In most cases, 90–95% LTV isn’t going to be an option. Be realistic and plan at least a 25% deposit.
  • Interest rate. How much are you expecting to pay? Is it fixed or variable?
  • Duration of the mortgage. A mortgage is always a long-term commitment, so make sure that your business can sustain it in the long run. Also, think carefully about whether you’d rather get rid of the debt earlier and temporarily have less money to invest in the rest of your activities (in which case you should pick a shorter commercial mortgage) or take more time to repay your property and have more cash every month at your immediate disposal (longer commercial mortgage).
  • Additional fees. Once again, be aware that fees will be higher than for a residential mortgage. If a lender offers you a particularly cheap interest rate, double-checking the fees to make sure there’s no trick can’t hurt.
  • Flexibility. What happens if your circumstances change? How much is it going to cost you if you want to repay the mortgage early?

Alternatives to a commercial mortgage

If you’re starting to think that a commercial mortgage isn’t what you’re looking for, think about these possible alternatives:

  • Rent. If you’ve just started your business or you aren’t sure whether you want such a long-term commitment, keep in mind that starting with renting instead of buying the premises isn’t necessarily a waste of money, as it allows you more flexibility and saves you from contracting debt.
  • Business loan. If the sum you need is not a large one or if your business meets certain conditions, you may give it a try with a less-complicated business loan.
  • Funding from investors. Selling a share of your business could help you gather the cash you need.
  • Government schemes. The government has a series of schemes in place to help businesses with their financial needs. You may be able to apply for one.

The complexities of commercial mortgages

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.

How to get a mortgage for a semi-commercial property

Even if you only use a small percentage of your building for commercial purposes, you’ll need to arrange a semi-commercial mortgage instead of a residential one.

This can sometimes be complicated because your lender will treat this as a commercial mortgage in many ways. That means lenders will assess the potential profitability of the property in a business sense. If you’re planning to run a business from the building, lenders will want to see your business plan. If you’re planning to lease it, the lender will need a financial forecast of the potential returns generated by the property.

Semi-commercial properties are typically only available with a 75% loan-to-value or lower, and some are available with terms as short as three years. You’ll also have to pay commercial stamp duty rates on purchases above £150,000.

If you don’t have previous experience investing in commercial property or buy-to-let property, you may run into difficulty being approved for one of these mortgages.

What property is classified as semi-commercial?

Here are some of the most common examples of properties that would require a semi-commercial mortgage.

  • Shops, offices or restaurants with flats above them.
  • Pubs with self-contained living accommodation.
  • Guest houses or B&Bs with owner’s accommodation.
  • Home-based health and beauty, hairdressing or pet care clinics.
  • Farms, attractions or holiday parks with residential accommodation.

What documentation is required?

You’ll need the same documentation as those applying for a residential mortgage, including proof of ID, proof of address and proof of income. This may include P60s, SA100s, SA302s or tax returns.

On top of that, you’ll need the following documents to satisfy the commercial aspect of the mortgage.

  • Commercial mortgage application form.
  • A copy of the lease.
  • Details of your existing property portfolio, if applicable.

Am I eligible for a semi-commercial property?

Because of the complexities of investing in commercial property, lenders prefer to approve applicants with experience in this market. If you have an existing commercial property portfolio, it may be easier to get the best deals. If you have a few years of experience investing in buy-to-let properties, this will also boost your odds of being approved for a semi-commercial mortgage.

Most semi-commercial mortgages require a deposit worth at least 25% of the property’s value, although there is a potential for this to decrease if you can offer another property as security. As with any other type of mortgage, the bigger the deposit you can stump up, the stronger your chances of having your application approved.

Your credit history and annual income will also play a significant role, just as they do with residential mortgages.

The more complex the property, the more weight that a lender will place on previous commercial investment experience. A shop or office with an apartment above it may be easier to get approval for than a farm or holiday park, for example.

How to improve your chances of being approved for a commercial mortgage

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.

  • Stump up a large deposit. Commercial mortgages are typically only available with a loan-to-value of 75% or lower. The more money you can put towards a deposit, the more comfortable a lender will be approving your mortgage application.
  • Build your credit score. Mortgage lenders will use your credit score as an indicator of how reliable you are at repaying debt. Applicants with high credit scores are more likely to be approved. You can build yours by ensuring you make timely repayments on all bills and debts via direct debit. Ensure you never go overdrawn, repay your credit card in full each month and check that your credit report is accurate.
  • Have tenants in situ. It’s easier to have a mortgage approved for a commercial property that already has tenants, preferably on a lease with two or more years remaining.
  • Add collateral. Most commercial mortgage deals only require the property you’re buying as collateral against the loan. However, some lenders may allow you to add other properties you own as additional collateral.
  • Work with a mortgage broker. Brokers with a specialist knowledge of the commercial mortgage market will be able to recommend the lenders most likely to work with someone in your financial situation.
  • Refrain from making too many applications. Don’t make the mistake of blindly applying to dozens of mortgage lenders and racking up a string of rejected applications. Every time you apply for a financial product, you’ll be credit checked, which temporarily knocks your credit score. A string of rejected applications made within a short time frame will make it more difficult to be approved in the future. That’s why many mortgage applicants work with a mortgage broker to boost the odds of having an application accepted first time around.

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