The commercial mortgage guide

There’s a lot to consider when it comes to commercial mortgages. This guide should help you cut through the clutter and find the facts you need.

The commercial mortgage guide | hero image

Are you looking to expand your business? Do you want to purchase your own office space? Does your enterprise need to upscale its premises?

If your business is doing well and you want to invest in property, a commercial mortgage could help you to move forward. But it’s not your only option. So is it right for you? Here’s our guide to help you figure it out.

What is a commercial mortgage?

Commercial mortgages are used for buying or defining any land or property for business purposes. They are a type of business loan that is secured against a commercial property, such as an apartment complex, warehouse, private office or shopping centre.

There are three main types of commercial mortgage. They are:

Owner occupied

This can be used if you want to purchase the premises where your business currently operates, or a new premises for your business to move in to.

Residential buy-to-let

This is for the purchase of residential property to be let for housing.

Commercial buy-to-let

This is similar to residential buy-to-let, but for commercial buyers. For example, if you buy a warehouse and rent it out to another company.

You can take out a business mortgage from a bank or from a specialist lender. High street banks might have good rates, but often have more stringent criteria. Specialist lenders are in general more flexible and expensive. Each will have different business mortgage rates.

Is a commercial mortgage right for my business?

It could be. If you need a large commercial loan and have the ability to put down a large deposit upfront then a commercial mortgage might be right for you.

It also depends on your trading history. Lenders want to know that your business can afford the mortgage and that you will be able to repay it, so you’ll need two to three years of filed accounts in order to be eligible.

A commercial mortgage is a type of secured loan, meaning you pledge an asset, such as the office space or apartment property, as collateral. The downside to this is that if you default, the creditor takes possession of your asset.

If that sounds daunting, you might want to consider taking out an unsecured business loan instead. This could be a good option if you need a smaller amount of money and have a good credit history. Unsecured loans offer the flexibility to choose how long you have to repay them and you don’t need to use property or any other asset as collateral.

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How does a commercial mortgage work?

The process is similar to applications for other mortgages. First you’ll need to complete and submit an 'asset and liability' form, which can normally be done online. You’ll then be asked to complete the commercial mortgage application form and to provide information about your business. The property will then be valued and legal due diligence will be carried out. If approved, you’ll receive a mortgage offer.

To apply, you might need to supply:

  • Bank statements usually covering the last three months
  • Trading figures usually covering the last three years
  • Proof of identity and address
  • Lease or tenancy agreements.

What are the pros and cons?

As with any financial product, there are benefits and drawbacks with commercial mortgages.

The benefits

  • Any interest you make on a commercial mortgage is tax deductible
  • You can rent out the property to generate extra income
  • If your property increases in value, your capital could also see an increase
  • You’re not subject to rent increases and can alter the property as you please

The drawbacks

  • You will need to pay a hefty deposit
  • As you are essentially buying a building, moving could be difficult and you would be responsible for looking after it, including repairs
  • Interest rates may be high, as commercial loans are a perceived high risk by lenders
  • A business mortgage is a secured loan. So if you default you could lose ownership of your real estate

How long are commercial mortgages for?

A business mortgage usually lasts from three to 25 years. If you want a shorter-term loan then you might need to look at a commercial bridge loan or development loan.

What can be offered as security?

The most common asset for a small business loan is property, including residential, commercial and rural land. Different lenders have different preferences about the type of assets they will accept as security. In some instances you may be able to use vehicles or equipment to secure your loan. Some banks say they can also use the value of your business as security.

When it comes to security, it’s not about your property or asset’s market value. What’s important is the remaining equity in the property. In general, you’ll need it to be at least 75 percent of the value of the property you are looking to buy.

Should I use a commercial mortgage broker?

As you can see, deciding whether to take out a commercial mortgage loan is not straightforward. There’s a lot to consider and if you do decide to go for it you will likely need to hand over a large deposit. A specialist broker can make the application process more manageable. They are experts, with access to a variety of lenders and they can give honest explanations and help you to work out the right option for you.