When do you need a commercial mortgage?
Commercial mortgages generally take over from business loans. Business loans up to £25,000 are unsecured but for larger amounts lenders require security to reduce their risk and as a consequence this falls into a different lending category where a commercial mortgage is required.
How to find the best deal?
Use a broker! Commercial Finance Brokers have access to a wide range of lenders and can more easily source a loan which meets your requirements and circumstances. Typically, lenders will go up to 75% LTV which means you have to be able to evidence a deposit of at least 25% of the purchase price. A broker will also have access to interest rates which are not generally available to the general public.
What security do lenders require?
The most common scenario is that lenders require a first charge over the property you are buying. In some circumstances a lender may look at a second charge over another property in which you have considerable equity in but this is not generally the rule.
Can you get a mortgage on a leasehold property?
It is possible to find a commercial property on a leasehold property, however, the property must have an unexpired lease of 40 years or more.
What is the length of a commercial mortgage?
Commercial mortgages typically range from 3 – 25 years. Short term (bridging) finance is also available if you require the loan from 12 – 24 months but you will need a robust exit strategy to show that you can repay the loan at the end of the term.
Interest rates on Commercial Mortgages
There are no standard rates for commercial mortgages as each case is different and the risk level will be assessed on your circumstances. You will need to provide a lot of information to support your application and the lending manager will offer a rate based on the amount of perceived risk. Needless to say larger loans with a low risk will attract the best rates. Lenders have a set criteria for risk and if your loan falls outside of this criteria it will be declined.
Types of interest available
Generally speaking interest rates will be quoted as a percentage over Bank of England base rate (BOE) or LIBOR on a standard variable or fixed rate basis, the former in residential terms would be called a tracker mortgage.
How much can you borrow?
For an owner occupied property you can borrow between 70% – 80%. If the property is an investment property the amount you can borrow will be determined by the amount of rental income the property will generate, however, the loan amount will not exceed 65% of the purchase price.
Arrangement fees are usually added to the loan. Typical rates are 0% – 2% of the loan amount depending on the lender.
Commercial properties are more variable than residential ones and a valuer will have to visit the property and will produce a comprehensive report on the property and business. Residential properties are not often visited by a valuer nowadays which is why they are much cheaper than commercial valuations which start at around £850 for a simple case but due to the variety of commercial property purchased prices are quoted on a case by case basis. The valuation is instructed by the lender and payment will need to be paid to them once an indicative offer has been accepted.
You will need to pay your own legal fees and those of the lender. Due to the variety of commercial property legal fees will vary depending on the complexity of the deal. Savings can be made on cost and time where it is agreed that both parties will use different partners in the same firm for representation.
Why use a broker?
It makes sense to use a specialist commercial broker who has the contacts and market knowledge to source you the best deal available for your circumstances. The broker will present your case to the lender, you must be present the whole facts both positive and negative and be co-operative with your broker. Do not use more than one broker as your application may then be presented to a lender via several different sources and will make the lender think there is something either wrong with the deal and you may well end up no loan offer.
By using a broker that is a member of the NACFB you can be assured that they will have Professional Indemnity Insurance and that they abide by an appropriate Code of Conduct. It is also worth checking if the broker has FCA approval, this can be done by visiting the FCA website and entering the broker details https://register.fca.org.uk/ By using an FCA approved broker you are ensuring that you will be working with a bone fide person/company and that they meet the FCA standards and provide a professional, high quality service.