Guide to Commercial Mortgages
If you’re looking to buy a property for a business, you’ll probably need a commercial mortgage to finance your purchase.
Before you begin your mortgage search, it’s crucial that you understand your monthly mortgage repayment budget and the potential growth of your business – constantly upsizing as the business expands can prove to be very expensive.
- You won’t suffer from any sudden rental increases
- As the property gains in value, so your business capital will increase
- You may be able to fix monthly mortgage repayments for a set period
- Interest repayments on a commercial mortgage are tax-deductible
- If your lender agrees, you may be able to sub-let a portion of the property to another business to reduce your monthly repayments
- It is likely that your monthly mortgage repayment will be at a similar level to the rental payments you would have been paying.
- You will need to come up with a substantial deposit to obtain a commercial mortgage, perhaps between 20% and 30% of the property value
- You will be financially liable for the maintenance of the property and its contents
- Any property depreciation will impact upon your business capital
- If you are on a variable rate, you may find your monthly repayments will increase.
Advantages and disadvantages of owning commercial premises
Before deciding to invest in a commercial property, you should weigh up the requisite pros and cons of doing so.
There are many advantages to buying a commercial property:
You should also consider some of the disadvantages of buying a commercial property:
Sourcing The Best Lender For You
Like a residential mortgage, you should always search the market for the best possible deal for you. You should actively consider using the services of an impartial, specialist commercial mortgage broker that covers the whole market. A broker will scour the market for the best deal and the most appropriate deal relevant to your business sector. Your broker should then continue to search for the market going forward in order to make sure you are constantly benefiting from the best rates available.
Generally, commercial mortgages are for 15 years or more, and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments. The majority of mainstream lenders offer commercial mortgages, but it’s important that you can meet their lending criteria. Although some lenders may still accept applicants or businesses with an adverse credit history, it helps if you can show a clean credit record, as this will give you greater choice and a more competitive deal. Lenders will apply a loan-to-value ratio to the mortgage and will often require you to invest some of your own money into the property. The more of your own money you invest, the more chance you will have of securing the mortgage.
The lender will also want information about your business and will be looking to see if it is profitable. They may request your business accounts and projections to check that the business has longevity and is not under any immediate financial pressures.
Some lenders may impose restrictions on the property, such as the ability to sub-let to other businesses, so you should seek professional advice from your solicitor, and if required, a chartered surveyor.
- Audited accounts for the last two years
- A profit and loss forecast for the next few years
- Current business performance
- The personal details of the key stakeholders in the business for credit-checking
- Asset and liability statements for each applicant
- A business plan detailing how the property will contribute to your cash flow and how you plan on repaying the loan.
- The credit status of the business
- Reasons why the business is being sold
- Details of any personal investments involved
- Growth projections for the business.
What information will the bank need?
Most lenders will request a lot of commercial information and it is worth preparing this from the start in order to help your application run smoothly. The information might include documents on the performance of the business, such as:
Remember, the main concerns of any lender will be whether you can afford to repay the loan and, should you default, whether the property is worth enough to cover the value of the loan.
Should you be buying a commercial property and a business together, you may need to provide additional information, such as:
Repaying the Mortgage
The mortgage repayment options are similar to those in the residential mortgage market, although you can expect to pay a slightly higher rate of interest, as commercial mortgages are generally seen as a higher risk to lenders. This is where it helps to have a big deposit, as a deposit of less than 20% may mean you pay a much higher interest rate to offset the increased risk to the lender.
In the commercial mortgage market, the majority of deals are either fixed-rate or variable rate. Fixed-rate deals are usually between two and five years and can provide you with repayment stability if this is required, although you won’t be able to take advantage of any falls in the base rate. On the other hand, taking a variable rate mortgage will allow you to benefit from any reductions in the base rate, but will also mean repayments may increase if the base rate increases.
The specific repayment options available are similar to those found in the residential mortgage market. A repayment mortgage option (where you pay the capital and interest back each month) means you will have all your bases covered in repaying what you have borrowed. You can also choose an interest-only mortgage, where you only repay the interest back each month on the amount you have borrowed. If you choose this option, the lender will almost certainly seek evidence of an appropriate insurance or investment policy that will cover the outstanding capital at the end of the loan term.
- Arrangement fees (usually between 0.5% and 1.5% of the loan value)
- Valuation fees (the cost of the lender undertaking a survey on the property to establish its value)
- Legal fees (including legal documents, insurance and your own surveys)
- Redemption penalties (a fee payable to the lender if you pay off your mortgage before the agreed term).
Other fees and Costs to Consider
There are additional costs associated with taking out a commercial mortgage and you should take these into account before you embark on your mortgage search, or seek clarification from your lender or broker. Such fees might include:
All You Need to Know About Commercial Mortgages
In the 21st century, the age of capitalism, private properties are everywhere, in our neighborhoods, cities, on nearly every corner. Simply just as the large number of business buildings, there are furthermore lots of private loans taken every day. Like residential properties, business buildings are constructed or bought with borrowed finance. Borrowed coinage utilised for the construction, purchase or refinance of a commercial building is usually called a business mortgage. Countless enterprises rely on it because the only option of finances. On the other hand, getting it really is rather difficult – it involves a considerable investment , a good businesses history, a robust business strategy and a large amount of paperwork.
Prior to applying to get a commercial mortgages you must be conscious of no matter whether the building you have set your eyes on can indeed be utilised for business purposes. Considering the mass array of properties accessible; you ought to ensure that you have the right facts and appropriate program in an effort to retain credibility and understanding when speaking to a lender.
When speaking to a mortgage brokers it is crucial that you remain aware of every detail behind the location; its age, condition and so forth as this will probably be your only collateral and if deemed unfit your chances of obtaining financial help will quickly disappear.
As with all economic aid; you has to be aware that your own credit history will play a significant part in figuring out the results of getting a mortgage, Your debt service cover ratio is going to be acknowledged and help a brokers service to decide if repayments are going to be produced.
Even if you can prove that you will have enough earnings to cover the fees of a financial loan, you might not be in a position to find it unless you place down a big deposit. Business lenders generally require 20% to 30% down payments. Some of them could accept much less, around 10%, if your additional finances appear sturdy, but you will have to pay out a greater interest rate instead.
Regardless of whether or not you qualify to get a loan will furthermore depend on exactly how risky your own business is. Though apartment complexes and office buildings remain regarded by private mortgage lenders as comparatively secure investments, companies like gasoline stations and brand new restaurants are viewed as much more risky and therefore can be far more hard to fund. Such purchases may perhaps need you to show that you have efficiently run these types of organizations in the past. Additionally, you will have to pay out for pricey environmental tests and in depth research so the lending company can ascertain if your own business can succeed in the imminent years. And if you are authorised for any financial loan for a high-risk property, you will most likely have to pay a much larger rate of interest. Make sure yo fully grasp the dangers involved and that your business is actually equipped to overcome them.The overall results degree of receiving a mortgage will naturally be determined by the capability of your business and mortgage brokers will regard some organizations as greater dangers than others, Plan out every thing to a t and take the economic climate and long term dips into account to remain ready that whatever your own business you make the right economic choice.