Mortgage Guides

Commercial mortgages - An introduction

Updated: Monday 28 November, 2011

By Martin Fagan

Thinking about taking out a commercial mortgage? Our guide will help you make the right decision and get the best deal for your circumstances.

If you run a small or medium-sized business and want to buy a property - whether it’s an office, shop, factory or warehouse - you need to think carefully about how you’ll finance your purchase.

Getting a commercial mortgage could be your best option, but you need to understand how commercial mortgages work and shop around to get the most suitable product for your circumstances.

In this guide we will look at the pros and cons of buying a property and getting a commercial mortgage, explain the different types of commercial mortgage available and offer top tips on getting the best deal.

• What is a commercial mortgage?
• What information will I need to provide to get a commercial mortgage?
• Different types of commercial mortgages
• How to get the best deal on commercial mortgages

What is a commercial mortgage?

A commercial mortgage is a loan, taken out by a business, to buy a property. Commercial mortgages are provided by banks, building societies and specialist lenders.

There are several advantages of buying a property and getting a commercial mortgage, as opposed to renting. The advantages of commercial mortgages include:

• Your mortgage repayments are likely to be fairly similar to rental payments that you would be making otherwise
• Buying a property provides your company with a major asset - if the property increases in value, your business capital will increase accordingly
• A commercial mortgage gives allows you to purchase a property with relatively low upfront costs. It also offers the flexibility to create a repayment plan that suits your business’ needs
• The interest payments on a commercial mortgage are tax deductible

There are also several potential disadvantages to buying a property and a getting a commercial mortgage. The disadvantages of commercial mortgages include:

• A mortgage is a long-term commitment which will likely need to be paid off over a period of 15 years or more
• You will need to come up with a substantial deposit - normally around 20%-30% of the property’s value
• You will be responsible for the maintenance of the property
• If the property decreases in value your business capital will decrease
• If you default on the mortgage, the property may be repossessed.

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What information will I need to provide to get a commercial mortgage?

When deciding whether to provide you with a commercial mortgage, a lender will need to look at your business to consider whether it is profitable and has longevity. They may request to see specific documents, including any of the following:

• Audited business accounts for the last two years
• Current business performance
• Projections for the next few years
• Personal details of key stakeholders (for credit checking)
• A business plan detailing how the new property will affect your business’ cashflow and how you plan to repay the mortgage.

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Different types of commercial mortgages

Generally, all commercial mortgages come with terms of 15 years or more and will require you to invest the company’s money into the property in the form of a deposit.

Commercial mortgages typically come with higher interest rates, compared to standard residential mortgages. This is because they are seen as higher risk.

There are two main types of commercial mortgage you will have to choose from. They are:

• Fixed-rate - This type of mortgage offers a fixed interest rate for a set period of time. The length of fixed-rate deals available is often individually negotiable with your lender and depends on market conditions. Opting for a fixed-rate commercial mortgage can help you avoid increases in interest rates and because the rate is fixed, your repayments will be the same each month for a set period and this can be helpful for budgeting. Once the fixed -rate period has ended, the mortgage will revert to the lender’s standard variable rate (SVR) for commercial mortgages
• Variable-rate - This type of mortgage offers an interest rate that changes over time, usually when changes are made to the Bank of England base rate
• You can usually get an initially lower rate on a variable-rate commercial mortgage than a fixed-rate commercial mortgage. You will benefit from any reductions in the rate, but need to think carefully about how your finances would cope if there was a sudden increase in the interest rate.

There are also two main ways to repay your commercial mortgage, as follows:

• Repayment -With a repayment commercial mortgage you will make monthly repayments that comprise of the capital you borrowed and the interest on it. You will make these repayments for a set period (the mortgage term) until you have paid off the mortgage completely. This is the most common way to repay a commercial mortgage.
• Interest-only - With an interest-only commercial mortgage you will make monthly payments that only cover the interest on the amount you borrowed. You will make these repayments for a set period (the mortgage term) and at the end will have to repay the amount you borrowed in a lump sum. To get an interest-only commercial mortgage you will need to be able to prove to the lender that you have an alternative repayment vehicle in place - such as an insurance or investment policy - that will cover the outstanding loan at the end of the mortgage term.

Which type of mortgage and which repayment method suits you will depend on the specific circumstances of your business and you should consider seeking professional advice on this matter.

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How to get the best deal on a commercial mortgage

When it comes to finding the best deal on a commercial mortgage, it pays to shop around. Interest rates can vary greatly between lenders and you should obtain quotes from a variety of different mortgage providers before making your decision.

Bear in mind that the bigger deposit you can put down on the property, the less risk you pose to the lender so the better rates you are likely to be eligible for.

Things you should consider when comparing commercial mortgage deals include the interest rate and term, how flexible the product is and whether early repayment charges will be applied. You should take into account all the costs of taking out a commercial mortgage, including arrangement fees, valuation fees and legal fees.

Getting a commercial mortgage is a big move for any business and it is essential that you seek professional financial and legal advice before making any decisions.

Get started by comparing commercial mortgages with Creditchoices.co.uk.

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THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.