What is a commercial mortgage?
A commercial mortgage is for investing in premises that a business, or multiple businesses, will occupy. The applicant might operate their own business from the property, or buy a property to rent out to another/some other businesses.
Acceptable security for commercial mortgages is usually bricks and mortar Freehold, Long Term Lease (LTL) and properties that will not have more than 40% residential usage.
Commercial mortgages can also be secured on land, with or without planning permission. If you then wish to build on the land, a development loan would be needed.
What is the difference between residential and commercial mortgages?
Residential mortgages are for domestic properties the owner intends to occupy, commercial mortgages are for properties that will be used for business purposes.
Commercial mortgages can be used to purchase both commercial and semi-commercial properties, either to operate a business from or to rent out.
Examples of commercial properties:
- Leisure centre
Examples of semi-commercial properties:
- Flat above shop
- Multiple rental properties and businesses on one plot
- Residential home and business on the same plot
- Terrace with houses and business premises
What is the difference between a buy to let and a commercial mortgage?
Buy to let mortgages are for domestic properties being rented out to tenants. Commercial mortgages are for business premises that are either owner-occupied (the investor runs their own business from the premises) is partially rented out (the investor runs their own business from the premises and lets part of the premises to other businesses) or have been bought purely for investment (the entire building is rented out to one or more businesses).
Sometimes those looking to invest in a buy to let property via a limited company think they need a commercial mortgage. This is not the case. The type of mortgage relates to the building use, not the type of applicant.
What is the process of applying for a commercial mortgage?
Our team of dedicated advisors and account managers are experienced in helping commercial cases from initial conversation through to completion.
Whether you are a company purchasing new commercial premises or an investor buying a property to rent to commercial tenants, we will help you secure and apply for the ideal commercial mortgage for you.
- Advisor consultation: Once you have submitted an enquiry, either through our application form, through our live chat service or by calling our team directly, you will be assigned a mortgage advisor to work with you. They will call you to discuss your needs. This will take the form of a 'fact find' where your advisor will ask for details of the premises and details of the occupying company.
- Sourcing the deal: Your advisor will take these details and search the marketplace to find a product that matches your needs. They will assess your requirements against lender criteria, and locate the most competitive interest rates within those you do meet. Rates can vary more between commercial lenders than a residential or buy to let lender panel.
- Asset and Liability form: This form requires details of all income and expenditure for the mortgage applicants and, if investing through a limited company, for the business too.
- Decision in principle: Sometimes known as a DIP or agreement in principle. Once your advisor has presented you with the best deal they can find from our panel of lenders and you have agreed with their recommendation they will apply for a DIP. This is a pre-application, non-binding offer by a mortgage lender, to loan an amount of money.
- Application: Once a decision in principle has been secure, your advisor will contact you to outline the deal. At this point, you will tell your advisor whether to proceed with a full application. It is standard procedure for all mortgage applications to include a credit check.
- Request for documents and information: Your lender will require a pack of information from you to process your application. You will be assigned an Account Manager to assist you with this as well as to ensure that everything is going smoothly from the lender’s side.
- Valuation: To ensure that they will be able to recover the funds they lend to you, your lender will require a valuation. They will then review all documentation for the application as a whole.
- Mortgage offer: If everything has gone smoothly, the lender will issue the commercial mortgage offer.
- Solicitor instruction: The mortgage lender will instruct their solicitor to start work at this point. They will, in turn, contact your solicitor. Enquiries and searches (if the application is a remortgage) are undertaken by the solicitors.
- Contract issued: The mortgage lender will issue the mortgage contract to your solicitor, who will check it before you sign it.
- Funds released: When the lender releases the funds they are paid into the lender’s solicitor’s bank account, then your solicitor’s bank account and lastly into the seller’s solicitors bank account. The case is now completed.
What is the criteria for a commercial mortgage?
The specific criteria required for a commercial mortgage varies from one lender to the next.
While lenders will have their own specific lending criteria, generally you will need to meet the following:
- Be aged between 18 and 75 (though some may accept older applicants). If investing through a limited company upper age may be less of an issue, as long as a line of succession is in place.
- Can reside in the UK or can be an expat with UK ties (e.g. bank account, tax records).
Most lenders have no set minimum personal income requirement from applicants.
If you are an owner occupier (you are buying the property to operate your own business from it), you will need to have a residential property. Your business can be established or a start-up, if it is a start-up you will need to have full projections or a business plan in place.
If you are buying commercial premises as an investment only, you will often need experience in buy to let or commercial lending.
How long is a commercial mortgage?
Commercial mortgage terms can vary from 3 to 25 years. Some are capped at 15 years.
Unlike residential mortgages, commercial mortgages are available for much shorter periods, though the terms offered vary with each lender. The terms of the mortgage are often dictated by the property itself, including its size, type, location and value.
Why do I need a commercial mortgage?
If you’re planning on purchasing a property for business use, you’ll need a specialist commercial mortgage.
If you own a property with a residential or buy to let mortgage, you’ll probably find it in the mortgage terms that the property cannot be used to run a business from. Some people will consider a business loan instead of a mortgage, though the amount you’re able to borrow is usually less. The rates on commercial mortgages tend to be lower than business loans, as a mortgage is secured against the property. This does mean the lender could repossess the property if you default on your mortgage.
How much deposit do I need for a commercial property?
Commercial lenders generally look for a 25%-40% deposit for a commercial mortgage.
The type of commercial premises being invested in will also affect the amount of deposit required. Some property types are at higher risk to lenders than others. Where this is the case, a bigger deposit may be asked for.
Another consideration, when it comes to raising a deposit, is that if you are struggling to raise cash, it may be possible to borrow against other property you own, if you have the equity available to do so.
Within the medical industry, commercial mortgage deposits can be lower or even not required at all.
Are commercial mortgages cheaper?
Commercial mortgages are secured on a property, whereas unsecured business loans are not. Where a lender has a form of security, this forms a back-up in instances where a borrower cannot repay a loan. As such, the risk is mitigated and rates will generally be cheaper.
By contrast, when compared to residential mortgages, commercial mortgages tend to carry more risk to the lender and be higher. However, they are different financial products, intended for different purposes.
Want to learn about commercial mortgage rates? Read our commercial mortgage rates page.