Commercial Mortgages

A commercial mortgage is a loan backed by a commercial property that offers flexible repayment options.

If you want to purchase property for your business or to expand your investment portfolio, a commercial mortgage might be beneficial.

Commercial mortgages operate in a way that is comparable to residential mortgages, as the lender provides funds to help you buy a property.

Similar to residential mortgages, you will repay your loan over time and need to stay current with commercial mortgage payments to prevent defaulting on the loan.

How are they arranged?

Commercial mortgages are designed to meet the needs of both the lender and the borrower; the lender requires security for their loan, while the borrower seeks to save money through lower repayments compared to renting.

A commercial mortgage holds greater importance than a residential mortgage, primarily because it offers essential funds for acquiring business properties. A commercial mortgage provides financing in various ways:

• Acquiring commercial property
• Managing land development projects
• Creating a business that is run by the owner.
• Expanding a buy-to-let portfolio.

Commercial mortgages typically have long terms, often extending to 25 years. A mortgage lender usually provides up to 70% of the property’s value, allowing your business to repay the mortgage in regular installments while using working capital for growth.

Most commercial mortgages typically provide up to 70% of the property’s value, so your business will need to source the remaining funds to finalise the purchase. This can often be a significant amount.

Pros vs Cons

Pros:

• Commercial mortgage payments are typically comparable to rent payments for the same business property.
• It is not in danger of having unexpected rent increases.
• You can rent out any additional space in the property to earn rental income, provided you have permission from the lender.
• You can make changes to the building and expand the space if your business increases, helping to prevent potential relocation expenses.
• Interest payments on commercial mortgages can be deducted from taxes.
• If the property appreciates in value, your firm’s capital will grow.

Cons:

• You typically need a significant down payment of 25-40% for a commercial mortgage.
• Moving can be more challenging because selling a business property is often more complex than simply ending a rental agreement.
• There could be additional costs to cover, including repairs to the building, security, insurance, and fixtures and fittings.
• If the value of the property goes down, your capital may be affected.

What do I need to apply for a commercial mortgage?

• A Strong Business Plan – A solid business plan should detail your vision for the business, identify your target guests, explain your marketing strategy for the property, and include your financial projections. Consider this an opportunity to demonstrate to the lender that your holiday let business is a viable investment.
• Evidence of Your Ability – Lenders are looking for proof that you have the skills to successfully operate a business. This may involve previous experience in the holiday rental sector or demonstrating relevant skills from other fields. Please mention any relevant skills or qualifications that show your capability to manage a property and provide a positive experience for guests.
• Property Valuation – A professional valuation is important to find out the worth of your property. This allows the lender to determine the amount they are comfortable lending you.
• Financial Information – Lenders must verify that you are in good financial standing. They typically request bank statementsA record of a borrower's financial transactions often requir..., tax returns, and any business accounts in order to understand your financial situation clearly.

What fees will I need to pay for a commercial mortgage?

• Arrangement Fees – Arrangement fees are usually included in the loan after it receives approval. Some lenders might ask for the arrangement fees upfront to compensate for their work if you decide not to accept their proposal. Arrangement fees typically range from 1% to 2% of the loan amount for loans up to £1 million.
• Valuation Fees – A valuer will assess the property and prepare a report for the lender. Commercial valuations typically begin at about £500 for straightforward cases, and the fees are determined based on a customised quote, payable to the lender once an initial indicative offer is accepted.
• Legal Fees – You will need to cover your own legal fees as well as those of the lender, which typically begin at about £500 for each party.
• Broker Fees – A broker provides tailored advice for your real estate situation and communicates your case to the lenders.

Pre-Approval for a commercial mortgage

There are specific requirements you must fulfill:

An overview of credit history and scoring – A solid credit score is important for getting approved for a commercial mortgage. Most lenders prefer a score of 640 or higher, but the higher your score, the better. They review personal and business credit reports. A clean credit history indicates that you manage your finances responsibly. Delays in payments, defaultsMissed payments on credit accounts, which can affect a borro..., or bankruptcies may affect your opportunities. Some lenders might approve loans for those with lower scores, but the interest rates will be elevated. It’s a good idea to review your credit reports before applying and correct any mistakes. Lenders consider your debt-to-income ratio as well. This indicates the portion of your income that is allocated to debt payments each month. A lower ratio is preferable since it indicates you have more cash flow available for a new mortgage.

Verification of Earnings and Business Feasibility – Lenders must verify that your business can handle the mortgage payments. They will request financial documents such as:

• Tax returns from the last 2-3 years.
• Financial statements showing profits and losses.
• Financial statements that summarise a company’s assets, liabilities, and equityThe difference between the value of the property and the amo... at a specific point in time.
• Financial statements from a bank.

These documents display your cash flow and profits. Having a stable or increasing income is ideal. Lenders need to know that your business generates sufficient income to pay back the loan and cover other costs.

They will review your business plan and analyse industry trends. This allows them to assess whether your business will remain profitable in the future. Certain lenders might request forecasts of upcoming income and expenses.

A strong down payment is beneficial as well. Typically, commercial mortgages need a down payment of 20-30%. A larger down payment can increase your chances of getting approved and might result in more favorable loan terms.

Evaluation by the Lender – Lenders evaluate commercial mortgage applications to assess risk and establish suitable terms. They review financial documents, property details, and the borrower’s background to make informed decisions.

Underwriting Procedures – Commercial mortgage underwriting includes a detailed assessment of the borrower and the property. Lenders review the applicant’s credit history, income, and assets. They evaluate the property’s value, condition, and potential income.

The process typically involves:

• Verification of credit history.
• Analysis of financial statements.
• Property valuation
• Review of the business plan for properties that are owner-occupied.

Lenders might ask for more documents or explanations at this point. The duration for underwriting can range from a few weeks to a few months, depending on how complex the application is.

Can I get a commercial mortgage for a start up business?

Being a start-up, you probably have little or no trading history. As a result, you’ll require a significantly lower LTV ratio.

Many start-up businesses often appear to have plenty of assets but lack sufficient cash flow, which is clear to lenders. If this is relevant to your business, they will probably consider security from an existing property, like your residential property. Many lenders are open to this kind of arrangement, and you will have room to negotiate later on when equity levels have been achieved.

Getting a commercial mortgage can support your business’s future financing; if the value of your property goes up, your business capital increases as well. When equity increases, it can be utilised to secure additional funding for growth and expansion.

Can I get a commercial mortgage for a limited company?

A limited company can either contact a lender directly or collaborate with a commercial mortgage broker to apply for a commercial mortgage and find the best deal. The application process involves providing detailed information about the company’s financial history, credit score, business plan, and the property they want to purchase.

The criteria for a limited company to obtain a commercial mortgage differ based on the lender. To be successful, the company should have a good credit score, a strong financial history, and a solid business plan. The lender will evaluate the property’s value, location, and its ability to generate income.

Many lenders provide commercial mortgage rates for limited companies. The best rates are influenced by the company’s credit score, financial history, and the property they wish to buy. Barclays, HSBC, Lloyds Bank, and Santander are among the leading lenders.

Can I get a commercial mortgage for a holiday let?

Financing a holiday let business needs a commercial mortgage, which is different from traditional residential or buy-to-let mortgages. Lenders see these properties as businesses rather than just investments.

Commercial mortgages are reviewed by actual people, not just computers and algorithms, which means your application is assessed manually. These professionals know the specific details of the holiday let industry and can customize a loan to meet your individual requirements.

Working with a knowledgeable mortgage broker who focuses on commercial lending can be very helpful. They can assist you in collecting all the required documents, presenting your case to lenders, and finding the best deal for your holiday rental business.

Can I get a commercial mortgage for an Airbnb?

Getting a mortgage for an AirbnbWhat is Airbnb? Airbnb is an online platform that allows pro... is possible, but there are certain challenges to keep in mind. It’s important to consider some relevant questions before proceeding.

• Are you planning to rent the entire house or just some individual rooms?
• What revenue can you generate, and will it be enough to cover the mortgage payments?
• Do you intend to stay living in any area of the property?
• Is it necessary to obtain consent from your current lender if you have an existing mortgage?
• How long are you considering renting the property on Airbnb—just a few days, weeks, or months?

Get in touch with one of our brokers to understand what information the lender requires. We can help you with the entire process and ensure you’re getting a good deal.

Can I get a commercial mortgage for a guest house?

Guest house mortgages are a type of commercial mortgage intended for properties where the owner operates a hospitality business on-site, like a bed and breakfast or a small hotel.

These mortgages are different from regular residential ones in a few key ways, mainly because they are intended to fund both a business and a home.

If you intend to reside in the property and use over 40% of it for residential purposes, you may qualify for a residential mortgage.

If most of the property is used for commercial activities, a commercial mortgage would be a better option.

Knowing these differences can assist in finding the best financing option for your guest house.

Eligibility:

Hospitality Experience – Lenders favor applicants who have some experience in the hospitality industry.

Business plan – You will need to provide a solid business plan to your lender. You need to include profit projections, analyse the market and competition, and outline marketing plans to reach high occupancy rates.

Deposit Requirements – Commercial mortgages generally need a larger deposit compared to residential mortgages. A deposit of at least 25-50% of the property value is expected.

Personal Finances – Your financial condition, such as your income, assets, and credit history, will be examined. Having a solid financial background can improve your likelihood of obtaining a favorable mortgage agreement.

Can I get a commercial mortgage for a care home?

It’s important to be aware of the details of commercial mortgages when seeking to finance the purchase of a care home. These mortgages are different from residential ones and are specifically designed for businesses in the care sector.

A key factor to look at when applying for a commercial mortgage for a care home is the loan-to-value (LTV) ratio. You can usually get financing for up to 75% of the property’s value, so you’ll need to put down a 25% deposit. Lower loan-to-value ratios usually lead to better loan terms, like lower interest rates and longer repayment periods, but these aspects can still change based on the lender.

Commercial mortgage interest rates for care homes typically begin at about 2% above the Bank of England Base RateThe interest rate set by the Bank of England, affects the in.... The rate you get will depend on several factors, such as your experience in the care sector, the care home’s financial performance, and its location. It’s important to compare offers and get quotes from various lenders to find the best rates.

The repayment terms for commercial mortgages for care homes usually extend up to 25 years. This gives your business the opportunity to earn money while spreading the property expenses over a longer time. You have the choice between repayment and interest-only options, so make sure to think about which one fits your business’s cash flow needs best.

Lenders will evaluate certain criteria when you apply for a commercial mortgage for a care home. Factors to consider include your experience in the care sector, the location of the property, and its financial performance, among others. Having a strong business plan and showing your capability to manage and expand the care home is important. This can improve your likelihood of getting favorable mortgage terms.

Can I get a commercial mortgage for kennels/catteries?

Borrowers usually need to meet specific criteria to obtain a commercial mortgage for kennels/catteries.

Borrowers need to provide specific documents like their credit history and business accounts or profit and loss statements to the lender in order to access commercial finance. This helps the lender assess the situation and decide on the likelihood of the commercial mortgage being repaid.

Commercial lenders will take a non-residential property as collateral for the commercial mortgage. This is to ensure that the lender has a plan in place if the borrower cannot make the commercial mortgage payments.

When securing commercial finance, borrowers usually need a deposit of up to 30%, unlike residential mortgages that generally require a deposit of 10%.

Can I get a commercial mortgage for a warehouse?

If you’re interested in investing in commercial property, you can buy a warehouse facility with a commercial investment mortgage to become a commercial landlord.

The commercial mortgage criteria you need to meet will vary based on the purpose of your purchase, but generally, lenders will consider:

• Loan-to-Value – Commercial lenders often consider the loan amount and loan-to-value (LTV) ratio of your borrowing, as well as your business assets, as extra security.
• Business Finances – You should consider the finances and trading history of your business, as well as those of any tenants if you’re planning to become a landlord.
• Credit history – Lenders will review your financial situation, including your income, assets, and credit history. A strong financial background can increase your chances of getting a good mortgage deal.
• Warehouse Specifics – The warehouse(s) vary in location, size, business class, and overall suitability.
• Business Plan – A business plan outlining the advantages of a warehouse for your own business or the expected rental yield if you intend to lease it.

Regardless of your reason for wanting to buy a warehouse, it’s advisable to consult with an experienced broker to find the best warehouse mortgage option for you.

Commercial lending can be complicated, and it’s important to submit a solid business plan along with your application.