What to Look for When Taking out a Commercial Property Mortgage
What is a commercial property mortgage?
A commercial mortgage – also known as a business property mortgage – is used to buy either:
- Premises for an established business
- Premises for a prospective business
The deposit and rates for a commercial property mortgage are usually higher than those required for a residential property mortgage.
What are the different types of commercial mortgage?
There are two different types of commercial property mortgage:
- Owner-occupier commercial mortgages – whereby a business owner rents the premises for their own trading purposes. Properties may include those with residential space above the business space, such as flats above shops
- Commercial property investment mortgages – applicable to buy-to-let properties in which an owner rents the space to third-party businesses
What are the terms for a commercial property mortgage?
The terms of a commercial property mortgage can vary depending on the current market. Before applying for a commercial mortgage it is wise to consider the terms that will best suit your planned business investment and any financial restrictions you may have.
Commercial mortgages typically require a down payment of at least 25% and sometimes as much as 40%, although this is unusual. The size of your loan and its interest rates will be determined by factors including:
- The current and past performance and future plans of the business you are considering
- The rent you expect to make on the property
- The security you can provide – if you own another commercial or residential property with a large amount of equity it can often be used as security towards your loan
- The lease of the property – if the commercial property is leasehold and has less than 70 years remaining, this will increase the security required to acquire the mortgage
Rates and repayment terms vary widely among commercial property mortgages but 15-30 years is the most common. A business loan too short-term to be considered a commercial mortgage (typically less than three years) is generally described as a bridging loan regardless of its size and rates.
What are the fees for a commercial property mortgage?
For those looking to apply for a commercial property mortgage, there is a diverse range of fees that should be investigated and considered. These include:
- Arrangement fees of 1-2% of the loan amount, paid on completion of the loan
- Commitment fees, paid upfront as part of an application to pay for the lender’s time if you don’t accept the offer. These are non-refundable
- Broker fees of up to 1% of the loan amount, payable when they’ve found you a loan that matches your stipulations
- Valuation fees, a mandatory part of your application. Commercial valuations are more thorough than residential ones. Price is bespoke and tailored to your situation, but starts at around £500
- The legal fees of you and your lender – the total amount will depend on your individual situation, but fees typically start at around £500