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How much deposit do I need for a commercial mortgage?
Paying a deposit is usually unavoidable when you’re taking out a commercial mortgage but how much you’ll have to pay depends on a range of factors.
A commercial mortgage is likely to be the cheapest way to finance your commercial property purchase, whether it’s a business you’re buying or a property to use as premises for your existing business. You might also be looking for a commercial mortgage to refinance a property you already own.
Do you need a deposit for a commercial mortgage?
In most cases you need to put down a deposit to get a commercial mortgage, which is typically at least 25% of the value of the property it’s secured on – in other words, you can borrow up to 75% of the property’s value (known as loan-to-value) – but could be up to 40%.
Your deposit limits the risk for the lender – the bigger the deposit you are able to pay, the lower the risk as the lender is less vulnerable to fluctuations in the value of the property if they have to repossess it and sell it to get their money back. It’s worth paying as big a deposit as you can so you have a smaller loan that you’ll have to pay interest on.
Unlike residential mortgages, commercial mortgages are bespoke to the borrower so the interest rate you’ll be offered and the amount of deposit you’ll have to pay depends on your circumstances. Interest rates are usually variable and based on the Bank of England base rate or Libor (London inter-bank offered rate).
It may be possible to get a commercial mortgage with a smaller deposit or no deposit at all but you will need to offer additional security for the loan, such as another property you own or other assets, but bear in mind that you risk losing them if you default on the loan.
How much of a deposit is required?
The size of the deposit you have to pay doesn’t just depend on the value of the property but also on the size of loan the lender thinks you can afford to pay back. To assess this it’s likely to take the following factors into account:
- How well the business is doing – if you’re taking over an established business or buying new premises for one, the lender will want to see two to three years of trading accounts to make sure it has the potential to generate enough income for you to pay back the loan. Also, the longer the business has been around for the better as it will be more established.
- Income projections – how much the business is likely to make in the future may also be taken into account, especially if it’s a new business or you’re planning to make significant changes to it.
- Your experience – the lender will want to see that you have experience of working in the industry your business operates in – the more the better. If you don’t have any, it may look at any other business experience you have but you might need to pay a bigger deposit or a higher interest rate or both.
- Your credit history and the credit history of your business – although having had credit problems in the past won’t necessarily stop you from getting a commercial mortgage, the lender might ask for more of a deposit or charge you a less favourable interest rate.
- The type of business – the size of deposit you will have to pay may also depend on the business sector you’ll be operating in based on how risky it’s seen to be. For example, you may only be able to borrow up to 70% of the property’s value if you’re buying a pub or hotel. This will vary by lender however.
- The type of mortgage – If you’re buying commercial premises to let to tenants you’ll need a commercial investment mortgage. You may have to pay a bigger deposit and a higher interest rate for these compared to owner-occupier commercial mortgages as they are thought to be riskier for the lender. The rental income you’re likely to get may also be considered as this will affect how profitable your business is.
How to get a commercial mortgage with the lowest deposit
When you’re taking out any kind of property finance, it’s a good idea to speak to a specialist broker as they can look at the whole available market to find the best deal for your circumstances. They will be able to find you a commercial mortgage with the lowest possible deposit as well as the lowest interest rate.
Commercial mortgage brokers can also access deals not available directly from lenders and help you through the mortgage application process, which can be complex.
What about business loans?
If you don’t have money to put down as a deposit and you only need to borrow a relatively small amount – to develop your business or improve a commercial property you already own rather than buying one for example – you could take out a business loan instead of a commercial mortgage. These can be unsecured or secured if you need to borrow a larger amount and can be arranged within days.
Bottom line
If you’re taking out a commercial mortgage to buy or refinance a business property you’ll almost certainly have to pay a deposit but as commercial mortgages are bespoke to the borrower how much you’ll have to pay depends on your circumstances.
Lenders will consider aspects such as how the business is doing, your experience in the industry, the type of business you’re running or taking on and your credit history. You can compare commercial mortgages here.
To make sure you don’t have to pay a higher deposit than you need to speak to a specialist commercial mortgage broker. They will also be able to help you get the best interest rate.
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