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We receive many enquiries from customers who are looking for a mortgage for commercial property in the UK, which is exactly why we’ve put together this article.
If you’re hoping to take out a mortgage on commercial property, want to know whether you’d be eligible for one, or are simply looking for more information about business mortgages, you’ve come to the right place. The following topics are covered below…
- What is a commercial mortgage?
- How does a commercial mortgage work?
- How to get a commercial mortgage in the UK
- What does the commercial mortgage loan application process entail?
- Commercial mortgage lending criteria
- How to get the best rates on a commercial mortgage
- How long are commercial mortgage terms?
- Commercial mortgages for small businesses and start-ups
- Commercial mortgages FAQ
- Speak to a commercial mortgages expert
Read on for more information about commercial mortgage loans or make an enquiry to speak with an expert advisor with access to every lender on the market.
Commercial mortgage definition: What is a commercial mortgage loan?
To put it in simple terms, a commercial property mortgage loan is the type of mortgage you would take out if you were buying a business premises or a business itself.
These products are usually taken out by businesses, business owners and aspiring business owners, and are considered the next step up from business loans. While commercial loans are usually capped at £25,000 and offered on an unsecured basis, commercial mortgages enable customers to borrow much larger amounts on a secured basis.
What is a business mortgage loan?
Business mortgage loans and commercial property mortgage loans are the same thing – they both refer to mortgages for business purposes and the terms can be used interchangeably.
What types of commercial mortgage loans are there?
Mortgage loans for business purposes can be broadly divided into two types:
- Owner-occupier mortgages – which are used to purchase a property that will serve as a trading premises for your company
- Commercial investment mortgages – these are typically used to invest in commercial property that you might be planning to let out.
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How does a mortgage for business property differ to a residential mortgage?
Commercial property mortgages differ from residential loans in several ways, such as…
- The deposit requirements are usually higher
- The rates and fees can be higher
- Most commercial property mortgages in the UK are variable rate
- A wider range of mortgage terms are available
- Lending decisions are often based on the viability of the business
We will cover each of these areas in greater detail throughout this article, but you can always make an enquiry to find out more. The advisors we work with are experts in business property mortgages and have access to every commercial lender on the market.
Business mortgages explained: How does a business mortgage work?
A mortgage on a commercial property works in much the same way as a residential mortgage on a house or flat. In most cases, you (or your firm) won’t be able to buy the commercial property outright with one of these loans. You will need to table a deposit or put up another property you own (and hold enough equity in) as security.
The amount of mortgage you will need is offset against the deposit (or the value of the security property) you have put down, and you will pay off the loan in instalments each month, plus the accrued interest, if the mortgage was offered on a repayment basis.
If the commercial business mortgage was offered on an interest only basis, you would only pay off the interest each month and settle the loan amount at the end of the term via a repayment vehicle, which the lender will want to see evidence of in advance.
How to get a business mortgage
Now that we’ve covered the definition of a commercial mortgage, we can move onto how you go about getting one and the key points you need to know about eligibility.
So, how do I get a commercial mortgage?
The best way to get a mortgage loan for a commercial property is through an expert broker with access to the entire market. They can give you bespoke advice on this market sector and connect you with the lender best positioned to help a borrower with your needs and circumstances (or your businesses’ needs and circumstances).
Obviously you and/or your business will need to meet the lender’s affordability and eligibility requirements to qualify for commercial mortgage finance, and you can read more on what they typically are by jumping ahead to the criteria section of this article.
What does the commercial mortgage application process involve?
An application for commercial mortgage funding typically involves the following steps…
- Find a whole-of-market broker (recommended) so you can be paired with the best lender for your circumstances (and/or your company’s circumstances)
- The borrower fills out an Asset and Liability form to evidence their company’s net worth (calculated by subtracting their liabilities from the value of their assets)
- If a lender is happy with the above, you will be invited to fill out a commercial mortgage application form
- Next the lender will want to know about you or your business’s income and expenditure to give them a clearer picture of affordability
- They will request three years’ financials to evidence the above
- The commercial mortgage underwriting takes place
- A valuation is carried out on the property you’re buying (and any properties you have put up as loan security) as well as your busines
- The solicitors carry out their legal due diligence
What documents are needed for a commercial mortgage application?
Your lender will be able to provide you with an Asset and Liability form as well as a commercial mortgage application form, but you will need the following…
- Personal/business bank account statements covering the last three months
- Trading figures for the last three years
- Proof of identity (Passport, driving licence etc)
- Proof of address (Driving licence, tax bills etc)
- Lease/tenancy agreements for your business premises
- A business plan (some lenders require this, especially for smaller businesses)
- Debentures and personal guarantees from the company directors (if you’re making a Limited Company business mortgage application)
Not every lender will require all of the above but you can make sure you’re fully prepared for your commercial mortgage financing application by speaking to an expert broker beforehand. They will help you prep and pair you up with the lender best positioned to offer you a favourable deal – make an enquiry to speak with one today.
Commercial mortgage costs and fees
In addition to loan repayments and interest charges, commercial mortgages come with a number of additional costs and fees for the borrower to foot, including…
- Commercial mortgage arrangement fees:
Usually due on completion and are typically charged at 1-2% of the loan amount for loans up to £1 million. Small balance commercial mortgages can come with higher arrangement fees
- Valuation fees:
Valuation reports are typically more stringent for commercial purchases than for residential properties and therefore often higher. The exact amount payable is determined on a case-by-case basis but, unlike with residential mortgages, the valuation fees are not usually demanded upfront
- Broker fees:
Most brokers will charge around 1% of the loan amount for arranging a commercial mortgage, but be wary of deals involving high upfront fees. Brokers should only be paid on success, and the ones we work with will refund any advance charges if they’re unable to arrange a commercial mortgage for you
- Legal fees:
Borrowers are usually required to foot their own legal fees as well as the lender’s and the total cost can vary. They usually start at around £500 per party, but a specialist broker may be able to help you find a more favourable deal.
For more information about the additional costs and fees that come with commercial business mortgages, get in touch and the advisors we work with will go through them with you over the phone and introduce you to the lender offering the best deals.
Eligibility criteria for commercial mortgages
Many of our customers want to know how to get approved for a commercial mortgage loan, and it’s a simple case of meeting the lender’s eligibility and affordability requirements. Read on to find out what the typical commercial mortgage requirements are at most UK lenders.
Business mortgage requirements
Commercial mortgage lenders assess applications based on the following factors…
- Affordability & serviceability
- Deposit size
- The applicant/business’s credit rating
- The viability of the investment
Affordability and serviceability
Commercial lenders will want to establish that the mortgage is serviceable, which means the projected income from the business is adequate and high enough to cover the cost of the loan. In terms of affordability, if the investment/business the loan is supporting is not profitable enough to cover the mortgage, other income the borrower has can be factored in
Specialist business lenders work out how much a business can borrow on a commercial mortgage by assessing the company’s operating performance, and they do this by looking at their earnings before interest, tax, depreciation and amortisation (EBITDA).
There is no hard and fast rule on the amount a commercial mortgage provider will lend based on a business’s EBITDA, but they will need to be confident that it shows the firm is profitable enough to afford the mortgage payments each month.
You should also be aware that some high street lenders and challenger banks might calculate affordability differently to specialist commercial lenders, so it’s important to apply through a whole-of-market broker to find the best option for you.
How much deposit do I need for a UK business mortgage?
Deposit requirements for commercial building mortgages, both owner occupier and investment, are often higher than for residential loans and usually range between 25-40%.
With the help of a specialist broker, it could be possible to find a lender who will offer a mortgage on a business property with the maximum loan to value (LTV) ratio of 75% to you or your firm, although there may be a workaround solution if you need higher LTV.
How can I get a mortgage for a commercial property with more than 75% LTV?
The simplest way to get a mortgage for a business property with a higher loan to value (LTV) ratio than 75% is by putting up additional security. By securing the loan against a property (or properties) you already own and hold adequate equity in, it may even be possible to get a mortgage loan on a commercial property with no deposit whatsoever.
Can I get a commercial mortgage if I have bad credit?
If you or your business has bad credit, it may still be possible to get a mortgage for a business premises or an investment mortgage. Although some lenders might refuse to offer you their best deals, specialist adverse credit lenders could be willing to give you favourable rates, depending on the severity of the credit problem and the date it was registered.
There are business mortgage finance lenders who specialise in customers with…
- No credit history
- Low credit score
- Late payments
- Missed mortgage payments
- Debt management Schemes
Although some commercial lenders only deal with businesses and individuals with a strong credit profile, the advisors we work with have access to lenders who specialise in all of the above niches, and in some cases, there might be workaround solutions available.
For instance, if you’re a new business that hasn’t been trading long enough to build up a credit profile, it might be possible find a lender that will let you offset this risk by putting up extra security or offering personal guarantees from the company directors.
The viability of the investment
Many commercial business mortgage applications are judged on the strength of the investment, which is why some lenders will ask to see a business plan before rubber stamping the application. This is especially true for commercial investment mortgages as most commercial providers will base their lending decision on the projected rental income.
When basing the amount they are willing to let you borrow on forecast rental income, the majority of providers will cap their lending at 65% of the property’s value.
Some lenders will expect rental coverage to reach 190% for commercial properties and 130% for buy to let, although specialist providers may accept anywhere between 110-125%.
If you’re looking for an owner occupier mortgage, most providers will calculate your debt cover using your ‘adjusted net profit’, i.e. your company’s net profit offset against things like interest and taxes to provide a broad indicator of a firm’s profitability.
Finally, it might help convince some lenders that the investment is viable if you and your business have prior experience in the relevant industry sector.
How to get the best rates on a commercial mortgage
As commercial lending is bespoke, the rates you will end up on will be decided by the lender after they have carried out a number of thorough checks to work out the level of risk.
This includes analysing the business’s current position, past performance and future plans.
We’ve already covered the main factors that can increase the level of risk, such as…
- The loan to value ratio:
Deals with high LTV are harder to come by in the commercial sector as the more deposit you can put down, the better in most cases, but it may be possible to offset some of this risk by putting down extra security
- Credit history:
Some lenders might consider you high risk if you or your business has bad credit, but there are specialist lenders for most forms of adverse
- Lack of trading history:
Some lenders consider this high risk and may ask for extra security or personal guarantees to offset the risk
- The type of property you’re buying:
Commercial mortgages can be used to purchase a wide range of property types, including shops, factories, hotels, office blocks and more. The rates you will be offered might vary depending on the property type as certain lenders will specialise in some and not others. Seeking out a whole-of-market broker will help you find the best lender based on the type of investment
Taking steps such as increasing your deposit size and putting up extra security can help minimise the risk involved in a commercial mortgage deal, but the best way to get the best rates is to apply through a broker who has access to the entire market. That way, you can rest assured that all of the best mortgages you’re eligible for will be within reach.
How long is a business mortgage?
Customers often ask us how long a mortgage for a commercial property in the UK would usually run for, and the answer is that terms in this sector can vary.
Commercial mortgage terms can range between three and 40 years – anything less than that would more commonly be a bridging loan. In terms of what is average for a commercial mortgage agreement, most tend to fall into the 15-30 year bracket.
Are there mortgage loans for small businesses and start-ups?
Yes, there are commercial mortgages for small business and the rates and criteria they will be subject to is exactly the same as for larger operations.
As for business mortgages for start-ups, most lenders will want to see projections and a business plan before rubber stamping a commercial mortgage. Moreover, a commercial mortgage for a new business may be more difficult to come by than for an established company as the lack of trading history can ramp up the level of risk involved.
However, some providers might be happy to offer a mortgage under these circumstances if the applicant has extra security to put up or the firm’s directors offer personal guarantees.
Commercial mortgages FAQ
Still asking what is a business mortgage? or looking for more information about qualifying for a commercial mortgage? This section contains additional details about these products and how to get them, based on the most frequently asked questions we hear.
Can a business get a mortgage?
Yes, commercial mortgages are available to eligible businesses (of all sizes) and individuals.
How long does a commercial mortgage take to complete?
Customers often ask us “how long does it take to get a commercial mortgage?” and while the time an application takes will vary from borrower to borrower, a matter of weeks is the minimum time frame for a straightforward application. If the deal is complex or high risk, it may take longer than this due to the lender carrying out more stringent checks.
Can I get a leasehold business mortgage?
You will only be able to get a leasehold commercial mortgage from most lenders if the lease has more than 70 years left on it. If this isn’t the case, additional security may be needed.
Can I get a commercial offset mortgage?
This might be possible as some lenders provide business offset mortgages.
With an offset mortgage, the borrower links a savings account to their mortgage and ‘offsets’ the amount of capital in it against the outstanding loan balance. They will only pay interest on the difference between to the two, so if you had a £200,000 mortgage with a linking savings account containing £50,000, you would only pay interest on £150,000.
A small number of lenders allow commercial borrowers to get an offset deal by linking a business bank account to their mortgage, although your savings account and your business mortgage will need to be with the same provider.
What types of commercial mortgages are there?
They can broadly be split into two types…
- Owner occupier: Basically, a business premises mortgage
- Commercial investment mortgage: For a property you’re planning to let out
Furthermore, it’s possible to get a business mortgage on a range of property types, such as…
- Leisure properties: Restaurants, pubs, clubs, hotels, gyms, casinos etc
- Semi-commercial properties: Offices with flats above, shops with flats above etc
- Retail commercial investment properties: Retail units, retail parks etc
- Office properties: Office blocks etc
- Industrial properties: Factories, warehouses, storage facilities etc
- Care homes: Nursing homes, hospices etc
- Professional properties: Doctor’s surgeries, private schools, vets etc
- Agricultural: Farms, farm buildings, farm land etc
Rates will vary for all of the above properties, as one lender might specialise in some types but not others. What one provider considers high risk, another might deal with every day. This is why seeking specialist advice from a whole-of-market broker is essential, so make an enquiry and the advisors we work with will help you find the right lender.
Do I have to pay Stamp Duty on a commercial property mortgage?
The short answer is most likely.
Stamp Duty Land Tax is payable on commercial land and property purchases worth over £150,000. However, the rates differ for leasehold and freehold transactions.
The table below (accurate at the time of writing) illustrates how Stamp Duty will be charged on a commercial property purchased on a freehold agreement…
|Purchase price||SDLT rate for each band|
|Up to £150,000||0%|
|Between £150,001 and £250,000||2%|
The table below (accurate at the time of writing) illustrates how Stamp Duty will be charged on a commercial property purchased on a leasehold agreement…
|Purchase price||SDLT rate for each band|
|Up to £150,000||0%|
|Between £150,001 and £5,000,000||1%|
Can I get a commercial mortgage if I’m a first time buyer?
Your choice of lenders might be fewer if you are seeking your first commercial property, as there are providers who prefer to deal with customers who have a strong track record in the relevant industry, especially if it’s a higher risk sector such as restaurants.
There are ways you can offset risk, such as putting up additional security or offering personal guarantees from the company directors, and there are also niche lenders who help first time borrowers in the commercial sector every day – make an enquiry and the advisors we work with will seek out the provider best positioned to offer you a mortgage.
Can I get a business mortgage if I’m self-employed?
A specialist lender might be willing to offer you a self-employed business mortgage. If you trade as a Limited Company, some providers will request debentures and personal guarantees from the company’s directors before rubber stamping the deal.
Although some mortgage companies don’t cater for self-employed borrowers at all, commercial lending is usually bespoke and deals are tailored to the individual, so it may be possible to find a lender who takes a broad view of your affordability.
The advisors we work with have access to every lender on the market and can pair you with one who handles commercial mortgage applications from self-employed people every day.
Can I get a SIPP mortgage on a commercial property?
Purchasing a commercial property with a self-invested personal pension (SIPP) is indeed possible through specialist lenders, and this comes with a number of benefits, such as…
- You will pay no capital gains tax if you sell the property
- You will pay no income tax on the rents you receive
- There might be no inheritance tax to pay when you pass the property on
Whether you’re purchasing on an owner occupier or commercial investment basis, most lenders who offer commercial pension mortgages cap the loan at 50% of the SIPP value. For example, if your pension holds £300,000, you can receive a £150,000 loan.
If you’re buying for investment purposes, the lender may ask for evidence that a lease is in place ahead of completion. For owner occupier deals, most lenders will assess the adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of your business.
If you’re getting a business mortgage in retirement, your age should not be an obstacle as there are lenders who have no upper age limits, and will lend to a pensioner of any age, as long as they can prove they’re capable of keeping up with the mortgage payments.
Can you get a regulated mortgage on a commercial property?
Given that commercial lending needs to be bespoke, flexible and tailored to the needs of the borrower, most commercial mortgages are not regulated. However, there are exceptions to this general rule – if you were to buy a retail unit with a flat above it, this might be considered a regulated mortgage for business purposes.
It all depends on the amount of residential floor space the property includes – if it’s 40% or more, then the deal will be regulated by the Financial Conduct Authority (FCA), giving the borrower more protection against things like mis-selling and bad advice.
For more information about commercial mortgage law in the UK and commercial mortgage regulation, get in touch and the advisors we work with will bring you up to speed.
Should I take out commercial mortgage insurance?
Business loan insurance is a form of life insurance which can help with corporate debts in the event of the borrower dying or falling seriously ill. It can cover the following…
- Commercial mortgages
- Business loans
- Corporate overdrafts
- Directors’ loans
- Venture capital funds
Business mortgage insurance is not a legal requirement but it could prevent your business from running into difficulties should the worst happen. The advisors we work with can help you determine whether taking out business loan insurance is vital for a commercial borrower in your circumstances. If it’s necessary, they will be able to connect you with commercial mortgage insurance companies who can offer you a favourable deal.
Where can I find commercial mortgage quotes?
You can get business mortgage quotes by approaching lenders who offer these products, but that isn’t the best way to go about it. Getting in touch with a whole-of-market broker will not only save you legwork, it will also ensure you end up with the best deal.
Get in touch and the advisors we work with will compare commercial mortgage quotes with you and your business’s eligibility and affordability in mind.
Speak to a commercial mortgages expert
If you have questions about getting a mortgage for a commercial property and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.