It’s not hard to feel confused when trying your best to figure out what mortgage option is the best for your business. If you’re hoping to compare business and commercial mortgages from a worthwhile resource, you’ve found it:
Can you get a mortgage on a commercial property?
There are many reasons as to why a business might look to invest in property. They may be tired of paying rental sums to a landlord, while also feeling restricted in what they can or cannot do with that property. They may need to expand and see this as a vital new business opportunity. It might be that a business has bespoke needs, and they require ownership of a property to put those plans into action. Whatever your reason, making this assessment can be an exciting time for any firm.
This is where commercial mortgages come in. They often come in two variants, variant rate or fixed rate terms, the latter often only lasting a set amount of time before the variables begin to kick in.
The benefit of opting for a commercial mortgage is that if your property increases in value, your business capital will also increase. This means that interest repayments will be tax deductible. It could also be that thanks to your ownership of the property, renting areas of your business or extending your potential utility over its income streams is a real possibility, lender-permitting.
Of course, we cannot expect commercial mortgages to operate in an identical fashion to residential mortgages. Commercial mortgages usually sport a higher rate of interest due to the increased perception of risk by lenders. This is why larger deposits are often looked on favourably, with a regular minimum of 20% or even more being provided as a baseline measure. Furthermore, depending on your lender or broker you may be expected to pay further fees and additional costs. Choose a broker that puts transparency first.
Big or small, we have no doubt that there are commercial mortgages out there for you to appropriately use. You just have to be ready to search the market and to compare your options, so to speak.
Types of commercial mortgages
The two main types of commercial mortgage are known as owner-occupied mortgages, and commercial buy-to-let mortgages. Let us consider what they both offer below:
It’s not uncommon for businesses to purchase the property they already operate in, or for them to purchase property that will become a base of operations for them. If your business is planning to move into a property, lenders may look at that favourably.
It’s also not uncommon for businesses to purchase property to let out to another business. This is what commercial buy-to-let options are for.
It’s important to remain mindful of the length of your terms, what kind of commercial finance may be required, and the minimum or maximum terms afforded to you.
What’s the difference between a commercial mortgage and home buyer’s mortgage?
It’s really rather simple. A baseline homebuyer’s mortgage is a loan that is secured against the residential property in question. This means that the lender has some collateral if you miss payments or other contributions required of you.
A commercial mortgage is a loan secured against the commercial property, but it can also be used to re mortgage said premises when hoping to raise capital for your business. This is often referred to as ‘releasing the capital.’
While both sets of mortgages work similarly in principles, there are important differences, such as the length of your contract, the upfront deposits, and the fact that a business can often put its liquidity at risk if failing to meet business demands.
How to get a commercial mortgage
When pursuing a mortgage opportunity, it’s always a good idea to look at it from the eyes of your lender. What makes you an enticing prospect? Can your business be trusted? Do you have a history of breaking even or of making profit, and do you have enough of a deposit to offer? Can you meet the repayment terms of the loan?
More than taking your word for it, lenders will often require a comprehensive business plan that demonstrates your lending worth. This might also involve a professional evaluation conducted by a third party.
You may find a commercial mortgage via:
- A commercial lender.
- A challenger bank.
- A specialist lender.
Remember that depending on the source you follow, you may be given a loan with differing terms. This is why using a broker is often a smart way of browsing your options. A broker can also verify you themselves, leveraging their great reputation to better connect you with lenders and make the deal happen. They will charge a fee for their efforts of course, but often they may be able to connect you to a more favourable deal.
What deposit will I need for a commercial mortgage?
This is somewhat similar to asking how long a piece of string is, as it all depends on the context of your situation. Depending on the length of your mortgage terms, your credit profile, your business plan and situation and the property you’re hoping to finance, deposit valuations can differ. Usually, 25% is the guideline.
Would a buy-to-let mortgage suit me better?
If you do not intend to buy this property through a business entity, buy-to-let mortgages can often be a great option.
Things to Keep In Mind
- Not all loans will cover the full extent of the property. Some may cover 80% of the value for instance, helping you gain more favourable repayment terms. It all depends on the lender.
- Certain schemes, such as funding for lending provided by some banks, may help reduce your interest rate.
- Bank of England rates can affect lending terms, which is important to note in 2020 especially as injections into the economy following the onset of Covid means this is a great time for those looking to borrow.
- Arrangement fees will often apply and must be accounted for within your search
- Commercial law differs in most countries and must be adhered to.