A commercial mortgage is a loan for property that is not the borrower’s main residence. A commercial mortgage can be used to purchase residential property, or by a business to purchase offices, workshops, retail units and other business premises.
How much can be borrowed?
For a loan of £50,000 or less, a business loan is usually more economical than a mortgage. Some commercial mortgage lenders will not consider mortgages under £75,000.
It is possible to arrange a commercial mortgage that runs well into seven figures, but a business needs to satisfy the lender that it can afford the repayments.
A commercial mortgage is normally available for around 70% of the property’s value, so a 30% deposit will be required. The property acts as security for the loan and can be repossessed by the lender if the business is unable to keep up with the repayments.
How long is the loan for?
A commercial mortgage typically lasts from 3 to 25 years. Bridging finance is available for shorter term loans.
What is the interest rate on a commercial mortgage?
Unlike standard mortgages for people buying their own homes, there is no set interest rate that applies to commercial mortgages. A lending manager assesses every application for a commercial mortgage on an individual basis. The manager will require a great deal of information about the finances of the business, as well as the value of the property being purchased. From this data, the manager makes a risk assessment. Large loans with a low risk assessment will have the lowest interest rates applied.
If the property is being rented either for residential or commercial tenants, the amount of rental income is taken into account when assessing the risks.
What other charges are there?
As well as paying interest, there are various fees charged for commercial mortgages. Arrangement fees of between 1% and 2% are often added to the loan when it completes. Some lenders will charge an arrangement fee at the time of a formal application for a mortgage. This is to cover the work that they do to assess the application, and will not be refunded if the borrower turns down the mortgage offer.
A valuer will visit the property in order to write a report for the lender. If the application is for a residential property then a full valuation report may not be needed.
Legal fees are charged for both the lenders and the borrower’s legal work. Legal fees can start around £1,000 and a valuation report starts at £500, but there are large variations on fees depending on the type of property purchased.
How to arrange a commercial mortgage
The best way to arrange a commercial mortgage is through a broker. Ascot Mortgages has the contacts and market knowledge to enable you to find the best deal people. We can help with your commercial mortgage application, making sure that you have all the information the lender needs to make favourable decision on your commercial mortgage application.