Commercial Mortgages are complex creatures and how they work can be confusing to even the most well established business owner. With rates, fees, loan amounts and repayment timescales intrinsically linked to your business performance, there is no hard-set scale for repayment rates. To help remove some of the murk surrounding commercial mortgages, we’ve put together a guide to explain some of the most common questions, including typical examples of how the loans function.
What is a commercial mortgage?
A commercial mortgage is a loan that is usually issued to support the purchase of land or property solely for commercial purposes. The lender is still a bank or financial institution but the loan is granted to a business rather than an individual. The main reason that businesses take out commercial mortgages is to acquire, refinance, or redevelop commercial property.
Similar to a residential mortgage, the money loaned is borrowed against a property such as commercial buildings or other business real estate, rather than any personal property.If the loan is defaulted upon, the recently purchased property could be seized by the financial institution, plus property you already own if it was used as security on the loan.
As with residential mortgages, the loan period is often longer than those of smaller value loans, usually between 15 and 25 years, although longer and shorter term mortgages are possible. Rates are typically higher than those offered in residential mortgages and can be linked to business performance and revenue forecasts.
How much can I borrow?
Commercial mortgages are to release large amounts of equity; typically the minimum loan amount is £25,000. If you’re looking for less capital, small business loans or overdraft services may be more suitable for your business needs. Again, with commercial mortgages, significant analysis of your business will have to take place before any interest rates and limits are agreed. Depending on the size of your business and its financial track record, the loan to value ratio could be anything between 75% and 90%, although the latter figure is more common for large borrowers with a strong, solid financial history.
Depending on the reason for taking out a loan, somelenders set the maximum loan limit based on the expected rental coverage of the property if that is the reason for purchase. This method is common amongst the high street banks and loan ratios could be as high as 130. However, with this option the loan amount it depends on the rental income available only and not the asking price of the commercial property.
How much will it cost?
For those seeking large sums, in the hundreds of thousands or millions, commercial mortgages are most likely the cheapest loan option available. Often, the interest rate offered for a mortgage depends on the history of the business, their credit check, profit forecasts and the future plans of the company.
Can I secure a 100% mortgage?
Yes, but with some caveats. Usually the maximum loan amount available would be between 75 and 85 % of the valuation or purchase price of the property. The lowest amount is usually selected. To secure a 100% commercial mortgage, additional credit security is required by the bank or lender, usually in the form of an additional property.
Are there interest only commercial mortgages?
Yes. However, this is not usually available for the full term of the loans. Typically the interest only period exists only during the first 3-5 years of the loan. After this period, the loan will become capital and interest for the duration of the mortgage. Fixed rate and variable interest terms are more common.
What is the time scale on repayments?
The term of a commercial mortgage is generally between 15 and 25 years, although shorter and longer term mortgages are possible. Shorter term mortgages are generally only available for stable commercial properties with established cash flows and between one and three years for properties in transition. Examples of these would be newly opened properties or properties undergoing renovation or repositioning. The same is typically true for longer term mortgages; these can be for up to 40 years covering large amounts of capital.
Do I need a credit check?
Yes. A credit check will be performed to aid in the decision making process as to the suitability of your mortgage. This is one part of the eligibility checks that the finance company will conduct. More of this is explained below.
Am I eligible for a commercial mortgage?
Lenders will often assess your business before quoting interest rates as the ability to keep up with payments over a prolonged period (some up to 40 years) will need to be determined. Past performance of your business, its current state and any future plans will be examined too. If any risk is determined to exist, the interest rate may increase based on these factors.
In addition to a credit check a detailed business plan for you business may need to be produced to show that repayments will be able to be met based on your revenue forecasts. Additionally a professional, independent valuation of your business may be conducted.
Are there any other costs in addition to the interest?
Typically there is an additional cost of between .75% and 1.25%, know as a arrangement or lenders fee. This includes the costs for valuation and legal costs depending on the complexity of the transaction. A typical breakdown includes:
These are usually between 0.75% and 1.25% per cent of the loan value.
This is the cost to the lender for the valuation survey property.
Banks charge around £750 + VAT on properties up to a value of £2m for documentation and processing.
Remember factor in any insurance and any of your own independent surveys or legal advice costs.
This is a fee payable to the lender if you pay off your mortgage before the agreed term.