Commercial Mortgages explained - Apply for a Commercial Mortgage

Commercial Mortgages

Commercial Mortgages are similar to residential mortgages in many respects. The main difference is that the collateral used for a commercial mortgage is not a residential property and is typically a commercial building or other type of business real estate.

Another difference is that businesses, as opposed to individual borrowers, tend to choose commercial mortgages, using business real estate as collateral to secure a loan. You will usually require 25 - 40% deposit to get a commercial loan. Rather than being assessed on your personal credit rating, as in a residential mortgage, a commercial mortgage is based on your business plan or previous performance and its ability to afford repayments. You will obtain a better rate of interest if your business is more secure; the higher risk the proposal, the higher rate of interest.

Borrowers who are attracted to commercial mortgages come from all types of business background - everyone from incorporated businesses to limited companies can qualify for a commercial mortgage. As there are many types of business to evaluate, the process for assessing credit history and the company’s value can be more complex than with residential mortgages.

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Non-recourse

In some cases commercial mortgages can be termed as non-recourse. This means that if repayments are not made the lender has the right to take the business’ collateral but nothing more. According to property law, the creditor has no right to the borrower’s other assets if a non-recourse contract has been signed. What’s more, mortgages which are sold as bonds are tied to a clause, which allow instant transferal of the business collateral to the lender if repayments are not forthcoming.

In many cases commercial mortgages require the borrower(s) to give a personal guarantee, stating that the debt will be fully repaid regardless of whether the collateral meets the outstanding debt.

Commercial Mortgage Applications

Many businesses wish to find a mortgage in order to acquire land, expand facilities or to refinance an ongoing debt payment. In the most part, commercial properties are purchased to expand a business, or develop a venture in strands such as office work, heavy industry or retail. Other purposes include residential and commercial property development. Commercial mortgages are generally repaid over around 10 years, depending on the business. If repayments are in arrears the property itself may be at risk.

How To Qualify For a Commercial Mortgage

If you want to find a mortgage, which is designed to suit your business; commercial mortgages are offered by many banks and building societies. However, the lending criteria is different to a residential mortgage in that your business must be creditworthy. Your business must also have a certain level of cash-flow which can be used to make loan payments and many lenders ask for a positive personal credit rating. In addition the lender will frequently ask borrowers to invest their own money into the purchase. If you’re hoping to find a mortgage for a commercial venture you’ll have to provide details which prove your business is stable and making a profit. Many lenders ask for long term financial projections and a comprehensive business plan to support the application too. In this way your lender can see that you will be able to make repayments now and in the future.

Therefore you should be prepared to provide audited accounts for at least two years, profit and loss forecasts for the coming year, bank statements, a detailed business plan and personal credit checks on company directors.

Be aware that lenders may impose a variety of restrictions on commercial mortgages depending on the type of business, premises and land you hope to buy.

As the terms of a commercial mortgage can be complicated it’s best to seek in-depth property advice from your solicitor and a chartered surveyor, to ensure you fully understand the mortgage.

How Can I Get the Best Deal On a Commercial Mortgage?

To get the best deal make sure your business plan is solid and comprehensive, the larger the deposit, the better the rate of interest that you will be offered. Consider prior to agreeing with a lender how much realistically your business can afford to repay monthly and make sure that the premise you are purchasing is truly suitable, consider for example what would happen if you enjoy more growth than expected - as prematurely relocating could be costly. Also consider restrictions that lenders may place on the loan for example the ability to sublet the property, this is particularly important if you think the premises has the potential of not meeting your future needs or is superlative to your business needs.

Interest Rates for Commercial Mortgages

In general, residential mortgages boast lower rates of interest than commercial mortgages. However, commercial mortgages are often connected to fixed rate loans, meaning that the interest is consistent throughout the mortgage period.

Property Advice Blog Tip!

Don’t confuse the fixed rate period of a commercial loan with a residential loan. Residential loans typically offer a fixed rate over a long period of time i.e 30 years, while commercial loan periods typically span from 3 to 10 years. Commercial loans are also generally classed as either variable or capped and are based on banking rates such as the LIBOR. In addition, if you take out a second mortgage as an additional loan, the second mortgage would carry a higher interest rate. This is because there is a greater chance that the lender would not recover payments if the loan was to default.

Should I buy or rent a commercial premise?

Buying property is almost always an investment and commercial property is no exception, buying in an up and coming area will not only benefit your business but could also make you money as the value of the property increases. The mortgage repayments are likely to be similar to that of renting the property so if you can secure a mortgage with good rates buying is a more attractive option.

Buying a property with a fixed rate commercial mortgage can give you more security than renting as you will be safe from any sudden rent increases. Furthermore interest payments on commercial property mortgages are tax-deductible. You will also have more freedom to development the property so that you can make it fit your needs as your business grows whilst avoiding relocation. However buying a commercial property requires capital that you simply might not have, this is particularly a problem for smaller, new businesses. You are also more tied down and can’t relocate as easily, this is why choosing the right commercial property is so vital if you are considering buying. A variable rate mortgage will also make your business vulnerable to changes in interest rates. There are other costs associated with owning your own commercial property for example maintenance costs, insurance and security.

Top Tips when comparing quotes of Commercial Mortgages consider:

• Arrangement fees set by the lender
• Valuation fees
• Early redemption fees
• Legal fees

Don’t be tempted to over-borrow, a problem with cash-flow will ultimately harm your business, similarly don’t overvalue the property.