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Commercial Mortgage Affordability

How much can I borrow for a commercial mortgage? Get the right advice here.

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 28, 2021

If you’re in the market for a commercial mortgage and are trying to figure out how much you could potentially borrow, you have probably already realised that the answer isn’t straightforward. Business mortgage lenders have complex affordability models, but luckily for you, we’ve put together this guide to commercial mortgage affordability to help clear things up.

How much can I borrow for a commercial mortgage?

The answer to this question will vary from one commercial mortgage lender to the next. Business mortageg 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.

Although many mortgage providers use their own in-house calculations to work this out, the exact amount you’re able to borrow 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). To put it simply, it will need to show that the business is profitable enough to cover the mortgage and interest 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.

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

How do I get a commercial mortgage quote?

You may have seen commercial mortgage calculator and online rates tables that churn out quotes and claim to have the answer to your affordability conundrum. These tools can be fine for a very rough idea of the amount you could borrow, but they aren’t the best way to get a projection. Speaking to a commercial mortgage broker is a better bet as they will take your needs and circumstances into account and use them to generate a range of bespoke mortgage quotes for you.

They know exactly how every commercial lender calculates affordability and will factor this in when rounding up the best quotes for you. Your broker will also make sure you’re matched with the mortgage lender who’s best positioned to be generous with the amount you can borrow and the rates they will offer you.

How much deposit do I need for a commercial mortgage?

Most commercial mortgage lenders will ask for between 25-40% deposit as the highest loan to value (LTV) ratio you’re likely to find is 75%.

It could, however, 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. A higher mortgage deposit will also boost your chances of securing a favourable interest rate.

Additional costs and fees

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 affordability?

Having 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.

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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 play a part…

  • 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 expert

Given that commercial mortgage affordability is complex and calculated differently across the lender spectrum, it’s vitally important that you seek professional advice before approaching a mortgage provider. Online calculator tools won’t help you out here, as they can only give you a rough idea of your affordability that might not be in line with what a lender is willing to offer.

The best way to get a true picture of the amount you can borrow is to speak to a commercial mortgage broker. They know exactly how every business lender on the market works out the amount customers can borrow, so they can give you a bespoke range of quotes and help you choose the most favourable one.

The right commercial mortgage lender can also make sure you get the best interest rate and guide you through every step of the application process. Call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry online and our free broker-matching service will pair you up with the expert who’s best placed to help a customer with your exact needs and circumstances.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the 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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