Commercial Mortgages Guide

Everything you need to know about borrowing to buy business property

If you’re looking to buy a business property, you’ll need to know what’s involved. The application process is quite different to residential mortgages, there’s no comparison sites and no off-the-shelf products. It’s all about you, the strength of your investment history and value of your asset.

Whether you’re a sole-trader, starting a business, small to medium enterprise or a large business in the UK, this guide will help you search, find and successfully apply for a commercial mortgage.

First up is a table of contents and glossary, then Section 1 – the basics. Look out for our ’Top tips’ too. They’ll fast-track you to becoming a commercial mortgages expert.

Good to know – glossary of terms

Loan-to-value (LTV)

Nothing special or unique here, it means the same: the ratio of the amount you’re borrowing against the market value of the property. So a mortgage on a property worth £100,000 at an LTV of 80% would mean your lender covering £80,000 and your deposit covering £20,000.

Buy-to-let (BTL)

This is a property that’s going to be let out to a third party.

Debt service coverage ratio (DSCR)

This is how a lender measures affordability. It looks at your cash flow and your debt obligations.

Forced Sale Value (FSV)

Your lender will want to know the FSV of your asset. This is the sale price you could achieve if you were forced to sell the property quickly, with no time to wait for the market value or a best offer.

Open Market Value (OMV)

Just as it sounds, this is the sale price you could achieve if you could sell on the open market and wait a few months for the best offer to come in.

Section 1

What is a commercial mortgage?

In this section we answer the following questions:

• What is a commercial mortgage?
• Which companies can apply for them?
• What can you buy with one?
• How much you can borrow, and for how long?
• Commercial mortgages vs residential mortgages.
• Benefits of using a broker/specialist.

What is a commercial mortgage?

A commercial mortgage is a loan secured on a property that you don’t live in, either your own business premises or one you let out. There are two main types: a business mortgage is for premises you use and operate from (owner-occupied), and a commercial investment mortgage is for a buy to let property. All commercial mortgages have a certain process including a commercial mortgage fact find

You can use a commercial mortgage to buy property or land, just like a regular property purchase loan, but there’s a considerable amount more involved when applying. You’ll can typically borrow between £50,000 and £40 million and will need a deposit of at least 20%, some lenders will let you use equity in another property you own instead of a deposit.

What types of company can get a commercial mortgage?

• Limited company (LTD)
• Limited Liability Partnership (LLP)
• Trust
• Offshore company
• SIPP/SSAS
• SPV (Special Purpose Vehicle)
  

You can also get one in your own name, for example if you’re a sole trader.

What types of properties can I buy?

• Business buy to let
• Residential buy to let
• Shops and retail premises
• Industrial real estate
• Office buildings
• Hotel, public house, spas
• Factories and warehouses
• Business property with a flat above
• Land
• Farms and agricultural property

Bear in mind that if you’re buying a business property with a flat above, your borrowing would come under residential regulations.

How much can I borrow?

For owner-occupied property, you’ll easily find a 70-75% mortgage. If it’s an investment, then the amount you can borrow will be determined by the rental income generated by the investment, but will usually not exceed 65% of the purchase price.

Common borrowing amounts:

– £100000

– £300000

– £250000

– £500000

How long can I borrow over?

The terms (lengths) available for a commercial mortgage are varied, and the right one for you depends on your business’ needs. Most lenders will lend for a minimum of three years, and up to 25 years. As explained earlier, the term you’re offered will depend on the quality of your application and your business’ circumstances.

Some lenders will also offer short-term finance in the form of a bridging loan or property development mortgage, with terms from two weeks up to 24 months. Also bear in mind that because of the legal and administrative costs of taking security on business property, it is considered uneconomic to borrow under £50,000 this way.

What type of rates are there?

You can get variable rate, fixed rate and interest only. You can read more about types of funding towards the end of the guide.

Commercial mortgages vs residential – the differences

The residential mortgage market (lending on a property you’ll be living in) is vast, with many different lenders and products to choose from. The commercial mortgage market is considerably smaller, with no ‘off-the-shelf’ products available. This means it’s more difficult to find a mortgage, compare interest rates, and apply online.

Whilst you may not find comparison sites and ‘best buy’ tables, that’s not to say the market is uncompetitive – just that the rate you get depends very much on the strength of your individual application. With commercial property financing, b2b lenders tailor their offer to your specific circumstances, your investment experience and the value of your asset.

Top tip: Your application can make or break your chances of funding, this is why a lot of applications are made through a specialist or broker. They can review and advise on the best way to apply through certain lender.

Benefits of using a broker or specialist

Brokers and specialists (like us) earn their corn on business property applications, as they can tell you how likely a lender is to accept your application beforehand, and help you improve your chances of being accepted. They can also recommend the best lenders to go to for your specific situation, both in terms of expertise and likelihood of being accepted.

With business mortgages, the most suitable lender for you can depend on your budget, your building and even the type of company you run.

Section 2

Commercial mortgages – pros and cons

You may feel a commercial mortgage is the right move for your business, and it may well be. But it pays to know what you’re getting into. In this section, we’ll take a look at the positive and negative aspects of this form of financing, to help you make a more informed decision.

Pros of commercial mortgages:

✅ In the current market, your monthly repayment is likely to be the same or less than an equivalent property’s rental payment. Plus your business isn’t at the mercy of sudden rental increases.

✅ Interest repayments are tax-deductible.

✅ Your business capital will go up if the property increases in value.

✅ Cash remains in your business in liquid form rather than tied up in a property for the long-term.

✅ Capital raising on your property can help you finance a larger cost for the ongoing investment into your business.

✅ For buy-to-let, a mortgage will match long term income (if a lease is in place) to long term repayments.

✅ Take more control of your business’ future by getting rid of a third party landlord and lease.

Cons of commercial mortgages:

❌ It’s a big commitment, with terms lasting up to 25 or even 30 years.

❌ Your business capital will be reduced by any property depreciation.

❌ There are no set rules for an application, lenders can ask what they like.

❌ They come with less regulation.

❌ You’ll need to factor in the complications of any planning, licensing or environmental issues.

❌ If you already own lots of properties in the same area, lenders may reject you based on the ‘concentration limit’ – if the market in that area goes down, you’re high risk.

❌ Repossession can happen very quickly on an investment property, Lenders are able to appoint a Law of Property Act receiver that can take any rental income direct from your tenants.

These points are to give you a rounded view of what your business is entering into before you sign on the dotted line.

Top tip: As we’ve mentioned, your application will be unique and will be evaluated on a case-by-case basis, so it’s always best to seek advice on your specific situation and any issues your application may face.

Section 3

How to get a commercial mortgage

In this section:

• Is a commercial mortgage easy to get?
• How long does an application take?
• What information will a lender ask for?
• What you be offered as security?
• Does having existing tenants help?
• Commercial mortgages for startup businesses

 Is a commercial mortgage easy to get?

If you’ve read this far, then you’ll know the fact that the borrower is a business and adds some complexity to the application process. Unlike with a residential borrowing, where your wage can be used and easily proven, the income and stability of your business is a major risk for a b2b lender and requires a lot more investigation.

From the structure of repayments through to the lending criteria, a commercial application involves a lot more due diligence. Also bear in mind that if you’re borrowing against a leasehold property (where you wouldn’t own the freehold), most lenders will want more than 70 years left on the lease, or some additional security.

How long will an application take to complete?

As you’d expect, times can vary as each application is dealt with on an individual basis and each lender has its own questions and processes. Prepare for anything from six to twelve weeks from the initial enquiry to decision.

What information will the lender ask for?

Commercial mortgages aren’t fully regulated, so there’s no agreed format for applications. This means different lenders ask for different pieces of information. The one certainty is that they all ask for a lot of business information, most of which you may already have to hand, including:

• Personal details of key stakeholders in the business
• Audited accounts for the last two years
• A profit and loss forecast for the next two years
• Current business performance
• Growth projections
• A business plan covering how the property will contribute to your cash flow
• How you plan on repaying the loan
• The credit status of the business
• Asset and liability statements for each applicant
• Details of any personal investments involved

What can be offered as security?

Typically, the property you are buying is the only security the lender will need for the loan. LTVs are usually at 70% – 80% so you’ll need a cash deposit for the balance of the purchase price. Some lenders will let you use another property as security instead of cash, as long as you have sufficient equity in it. Aside from this, insurance policies or shares can sometimes be used, but often with specific caveats and charges.

It really does vary by lender, some will prefer taking second charges, rather than the first charge, against property. Others prefer to take certain types of property and have specific requirements when it comes to land and even the location of the asset.

Does having existing tenants help?

How you intend to repay the loan is a key question your lender will ask, so if your property comes with tenants paying more than the monthly repayment, this is always a plus.

Commercial mortgages for startup businesses

It’s possible, but you’ll be seen as a high-risk customer because you’ll have zero trading history. You’re likely to be offered an LTV of around 50 percent, so to secure the lending you’ll need to have a significant lump sum to lessen the risk for the lender.

Lenders will also require a robust business plan including financial statements for the applicants, detailing income, expenditure, assets, liabilities and more. You’ll also need to include cash flow forecasts and projections, market research, personal information on the key stakeholders and maybe even on the management team.

Top tip: For a lender, a property that’s tenanted on a standard FRI lease with more than two years remaining is great news. It’s great news for your application too.

Don’t worry if the property isn’t tenanted though, there are plenty of funding options for vacant units, just usually up to 75% LTV and on an 180-day valuation. This is the valuer’s estimation of the property sale price, if sold within 180 days.

Where to find the best mortgage deals

In this section:

– The three lender types and their pros and cons.

– Why it’s advisable to use a registered broker.

The success of your application will depend on many different factors. All lenders will want to look at your business accounts, profit projections and the property value, but some may also want to look at your personal finances too.

Don’t assume that an adverse credit history will ruin your eligibility, it just means cheap deals probably won’t be available to you. Your options:

✅ If you qualify, their rates are hard to beat.

✅ They often allow you to borrow against the OMV (Open Market Value).

✅ They usually offer a high LTV (Loan to Value), which means a larger borrowing.

✅ Shorter minimum periods.

❌ Their lending criteria can be difficult to meet.

❌ They will need a high DSCR, which means you must have a larger income to maintain the exact amount of debt than you might with other lenders

❌ Recent credit issues usually mean an instant ‘no’.

❌ The application process can be lengthy.

❌ Decisions take a long time too, often more than 3 months.

Challenger banks

Criteria

✅ Applications with credit issues in the last two years are considered.

✅ Can offer interest-only repayment options up to the maximum LTV, great for businesses buying for cashflow reasons rather than capital gains.

❌ Generally more expensive than the high-street banks.

❌ Higher exit fees, not great if your future is uncertain.

❌ Funding is often agreed on the 180-day period rather than the OMV, which can lower the lending amount.

Niche lenders and specialists

✅ A lot more flexible.

✅ Good if you’ve not been in business long.

✅ Often prepared to lend on a short trading history.

✅ Some let you use projections instead of previous usually more expensive history, if signed off by an accountant.

✅ Lower DSCR than high-street banks.

✅ Better bet if your property is in an unusual location or offshore.

❌ Typically more expensive to offset the risks than those you’ll get from the banks.

❌ Tend to lend against the Forced Sale Value.

❌ Longer terms.

❌ More restrictive exit fees than other lenders.

As with any financial product, do your research and consider all options on the market before making a decision to commit, which brings us onto brokers.

Should I use a mortgage broker?

Commercial mortgages are complex, typically requiring higher deposits than residential loans, and a strong application. As a result, it’s definitely worth speaking to an NACFB registered broker to see how they can help, if only for an assessment of your application.

Brokers and whole-of-market intermediaries can look at rates and products from both high street banks and niche lenders too, so you can be sure that you’ve considered every option before signing.

Top tip: Brokers can also have good, or at least existing, relationships with lenders, which can work in your favour.

Commercial mortgage calculator

In this section:

• How much will my mortgage cost?
• Commercial mortgage calculator.
• Costs/fees involved in a commercial mortgage.

How much will my commercial mortgage cost?

You can use our calculator to get a rough idea of your monthly repayment. Typically, commercial funding can be arranged up to 80% loan to value, but this is best-case scenario. The terms of your agreement, including the deposit you’ll need, the rate and term you’re offered, will depend on the quality of the asset (property) and your own investment experience.

Mortgage costs to consider

The monthly repayment isn’t the only cost you should factor, there are additional costs too. Here’s a run-down:

• Arrangement fees (usually around 1% of the loan value).
• Legal fees (your own survey, documents and insurance).
• Valuation fees (the cost of a lender survey to establish the property value).
• Redemption penalty (if you pay off the loan early).
• Refurbishment fees (renovation costs on your property).
• Stamp duty (payable on properties of £150,000 or more).
• Commitment fee (to cover the lender’s costs if you don’t accept their offer).
• Broker fees (expect to pay up to 1% of the loan value)

Top tip: Pre-agree and define loan offer terms with your broker and don’t pay them anything until they present an offer that matches those terms.

Section 6

Types of commercial mortgages

In this section: 

– The different types of commercial mortgages.

– Types of mortgage rates.

There are three types of commercial mortgage, the one you need depends on what you’re planning to do with the property you intend to buy:

Owner-occupied

This is typically taken out if you want to purchase your current premises, or want to buy new premises.

Residential buy-to-let

Commonly used by buy-to-let companies and professional landlords to buy residential property that will be let to tenants.

Commercial buy-to-let

Same as residential buy-to-let, only this is used on business premises that will be let to a company. Although similar to a residential buy-to-let, funding approval will be harder to achieve as it’s generally more difficult to rent out these properties.

Types of mortgage rates

The majority of lenders only lend to businesses on a variable rate that tracks the Bank of England base rate or LIBOR. In this respect, they operate in a similar way to a residential tracker product. Fixed rate funding is available though, if you prefer a monthly repayment that’s locked in for the term, usually for no longer than five years.

It‘s possible to get an interest-only agreement, but the lender will want to know exactly how you propose to clear the debt at the end of the loan term.

There are also Commercial Mortgage backed securities.

Top tip: If you’re borrowing under half a million, it can be advantageous to go fixed and let the lender take the rate risk. As always though, seek advice for your situation.

So there you have it, a comprehensive guide to commercial mortgages today – what they are, the pros and cons, how to get one, where to getone and the types to choose from. You’re now in a stronger and more informed position to search, find and successfully apply for funding and move your business forward.