What is a Commercial Mortgage?
A commercial mortgage is a long term loan used to buy or refinance a business property such as an office, shop, warehouse or factory. Unlike a residential mortgage used for a home, a commercial mortgage is for a property that will be used for business purposes. This type of finance is used when businesses that want to own their premises rather than renting, it can also be a way to build a valuable asset for the business over time.
The mortgage is secured against the property itself. This means that if the business is unable to make its repayments, the lender has the right to repossess and sell the property to recover the outstanding debt. Because of this security, commercial mortgages are designed for larger amounts over long term borrowing periods, and the repayments can then be made more affordable and sometimes lower than rental costs of similar commercial properties.
A commercial mortgage can be a significant step for a business, moving it from a tenant to a property owner. This can provide greater stability as the business is no longer subject to rent increases or the risk of a landlord choosing not to renew a lease. Owning a space for your business also means you can invest in making it a great fit for your needs. For many small to medium-sized businesses, owning their own premises is a long-term goal that helps to cement their presence and provide a tangible asset for the future.
How Commercial Mortgages Work
The process of obtaining a commercial mortgage is similar to a residential mortgage, but with some key differences. Lenders will assess the business’s financial health including its trading history, turnover and profitability. They will also look at the financial position of the business owners, particularly for smaller companies. The lender will need to be confident that the business can afford the repayments over the long term.
Lenders typically require a deposit from the business, which then is known as a loan-to-value (LTV) ratio. This means the amount the business has to put down as a deposit is a percentage of the property’s value. The LTV for commercial mortgages is lower than for residential mortgages, meaning the business will need to have a larger sum available for the deposit. The interest rates can be fixed or variable and the repayment structure can be based on a capital and interest or interest-only basis, for a set term.
There are two main types of commercial mortgages that a business might consider:
- Owner-Occupier Mortgages: This is for a business that intends to use the property as its primary place of operation. It is the most common type of commercial mortgage for small to medium-sized businesses looking to purchase their own premises.
- Commercial Investment Mortgages: This is for a business that buys property to rent out. The lender’s assessment will often focus more on the potential rental income from the property and the strength of the tenants’ leases as this income will be assessed against the mortgage repayments.
Commercial Mortgages in the Context of Business Finance
It is important to see a commercial mortgage as one of several options within the wider business finance landscape. It serves a very specific purpose: purchasing or refinancing a property. This is different from other forms of business finance which are better suited for other needs.
For example, if a business needs to buy new machinery or a vehicle, asset finance might be a more appropriate option. If it needs to bridge a short-term cash flow gap while waiting for customer payments, a business credit line or invoice finance would be a better fit. Commercial mortgages are long-term commitments for significant capital expenditure whereas other forms of finance offer shorter-term, more flexible solutions.
A commercial mortgage can be a good alternative to a business taking out a loan to cover its rent costs. Instead of paying rent to a landlord, the business is paying off a mortgage, which is an investment in a property it will eventually own. This can be a strategic move for a business looking to build its balance sheet and secure its future location. For larger businesses, a commercial mortgage can be a part of a complex funding structure, perhaps alongside other forms of lending to acquire multiple properties or expand a portfolio.
Ultimately, the decision to take on a commercial mortgage is a carefully considered strategic one and involves weighing the benefits of ownership against the responsibility of a large debt. For many businesses, the stability and potential for capital appreciation that comes with owning their own property make a commercial mortgage an attractive and valuable financing tool.
Commercial Mortgages FAQs
How much deposit do I need for a commercial mortgage?
The deposit required for a commercial mortgage can vary. Lenders typically look for a deposit that starts around at around 20% of the property’s value. However the amount will depend on the lender, the strength of the business’s financial position and the type of property.
Are commercial mortgages more expensive than residential mortgages?
Commercial mortgages can often have a higher interest rate compared to residential mortgages. This is in part, because lenders consider commercial properties to have a higher risk profile to lend against. The fees involved, such as valuation fees and legal costs, can also be higher.
Can I get a commercial mortgage for a property that is part-residential?
Yes, it is possible to get a commercial mortgage for a property that is part-residential, such as a shop with a flat above it. This is often referred to as a semi-commercial mortgage. Lenders will assess the application based on the property’s split-use and the business’s ability to cover the repayments.
What types of property can a commercial mortgage be used for?
A commercial mortgage can be used for a wide range of property types. This includes offices, retail shops, industrial units, warehouses and specialised properties like hotels or care homes. The type of property will affect the lender’s assessment of the application and the terms of the mortgage.
How long does it take to get a commercial mortgage?
The process for a commercial mortgage can take longer than a residential one due to the complexities of commercial valuations and legal procedures, however this really depends on the case. The speed of the process can be assisted by how well prepared the business is with its financial documents and business plan.