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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 15th April 2021*

We hear from lots of customers who are in the market for a commercial mortgage and want to know how much they will be able to borrow. The answer to this question isn’t always simple, which is why we’ve put together this guide to commercial mortgage affordability.

You’ll find the following topics covered in-depth below…

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How much can I borrow for a commercial mortgage?

Customers regularly ask us things like “why can’t I find a commercial mortgage calculator that shows how much I can borrow?” and the answer is because there are no hard and fast rules on this.

Commercial lending is usually determined on a case-by-case basis and the amount you and/or your company is able to borrow can vary across the board.

How do commercial lenders calculate affordability?

We often hear the question how much can I borrow on a business mortgage?” and the answer would usually be based on an assessment of you and/or your firm’s operating performance.

Specialist lenders will determine whether the mortgage is serviceable and affordable based on earnings before interest, tax, depreciation and amortisation (EBITDA) – it will need to show the business is profitable enough to cover the mortgage payments.

There is no absolute rule on how much you will be able to borrow based on EBITDA figures. The deal you’re offered would usually be bespoke, tailored to you and/or your business.

If the investment/business the loan is supporting is not profitable enough (based on adjusted net profit) to cover the mortgage payments, some lenders will allow you to declare other legal forms of income and factor them into their affordability assessments.

Is affordability calculated differently for commercial investment mortgages?

The main difference between owner-occupier and commercial investment mortgages from an affordability standpoint is that the lender might base the amount you can borrow on the forecast rental income.

Some providers will expect it to reach 190% coverage for commercial properties and 130% is standard for buy to let investments.

However, there are specialist lenders who will accept anywhere between 110-125% rental coverage, though lending is usually capped at 65% of the property’s value.

How much deposit do I need for a commercial mortgage?

When customers ask us how much business mortgage can I get?” we always ask them to consider how much business mortgage they actually need, and this will come down to the amount of deposit they have to put down, among other factors.

So, how much deposit will you need? Well, most commercial lenders will ask for between 25-40% deposit as the highest loan to value ratio you’re likely to find is 75%.

However, it may be possible to get a higher LTV deal (up to 100%) if you’re able to put down additional security, such as a property or properties you own and hold enough equity in.

The more deposit you have, the better your chances of securing the mortgage you want since you’ll obviously need to borrow less than someone with a smaller deposit.

What additional costs and fees does a commercial mortgage come with?

When it comes to any mortgage product, it’s important to get a full picture of affordability by weighing up all of the costs involved. The overall cost of a commercial mortgage comes down to more than just the monthly payments and the deposit amount you’ll need.

There are also additional costs and fees you may have to foot, including…

  • Arrangement fees: Usually charged at 1-2% of the loan amount for commercial mortgages of up to £1 million. Small loans can come with higher arrangement fees.
  • Valuation fees: Valuation reports can be more stringent for commercial mortgages (compared to residential) and the exact amount payable will vary from one lender to the next. Unlike with residential, some lenders won’t demand these fees upfront.
  • Broker fees: Usually 1% of the loan amount but be wary of deals with high upfront broker fees. The commercial mortgage brokers we work with only charge on success and will refund any advance charges if they’re unable to arrange a commercial mortgage for you.
  • Legal fees: Commercial borrowers usually have to foot their own legals as well as the lender’s. Around £500 per party is a typical amount for legal costs.

How does having bad credit affect commercial mortgage affordability?

Having any adverse credit on your file might affect the commercial mortgage you’re eligible for as it can mean fewer lenders to choose from, and some providers might be unwilling to offer you their most favourable deals unless your credit rating is spotless.

That said, there are commercial lenders who specialise in bad credit customers, and they might be willing to take the severity and age of the credit issue on board when assessing you for the mortgage you’re looking for.

It’s also worth bearing in mind that there might be ways you can offset the risk your bad credit poses, such as putting up extra security or offering personal guarantees from the company directors.

How does the term length impact affordability?

Commercial mortgages can vary from between three and 40-year terms, although most tend to fall into the 15-30 years bracket.

The length of time you spread your mortgage payments over can have an impact on the overall cost as a shorter term means larger monthly payments but less interest overall, while a longer term means smaller payments but more interest accrued over time.

Which term length is right for you will depend on a number of factors, such as how much you and/or your business can afford to pay out each month.

What else impacts commercial mortgage affordability?

Qualifying for the commercial mortgage you’ve got your sights set on is a case of meeting the lender’s eligibility criteria.

After all, lower interest rates means lower monthly payments.

We’ve already covered the main factors that impact this such as profitability, credit history and deposit size, but the below can also have an affect…

  • Your industry experience: If you’re a new investor or your business is a start-up, a specialist lender might be required as some providers prefer borrowers to have experience in the relevant industry, especially if it’s a high-risk sector such as retail.
  • Your location: As commercial lending is usually bespoke, there aren’t too many location restrictions, but loans in Northern Ireland are difficult to transact, so be sure to seek specialist advice if you are investing in this territory.
  • The property type: Certain commercial property types, such as agricultural and churches, may require a specialist lender as not all providers offer mortgages for these. Rates and LTV will be calculated on a case-by-case basis.

Speak to a commercial mortgages affordability expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry online.

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.

Updated: 15th April 2021
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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