This guide will help you to understand what commercial mortgages are, when you can use them and the advantages and disadvantages of getting a commercial mortgage.
The main areas covered by this guide include the definition of a commercial mortgage and a comparison between buying and renting for business properties. It will also detail the requirements specified by commercial mortgage lenders, different types of lender and different methods of commercial mortgage repayment. Costs associated with commercial mortgages are detailed and you will discover where to find mortgage help, quotations and service online.
It is important to make sure you contact the right person, and understand how the mortgage will be calculated and also paid back.
There are many places that you can find a lender online. Be careful which lender you choose and make sure that they are certified.
An Overview of the Commercial Mortgage
Buying commercial premises can be a good investment. Owning a property gives your business stability, and the property itself can become a significant asset.
Alternatively, you may be buying a business that is tied into the property - for example a hotel, public house or café.
If you decide to buy premises you'll probably need to consider taking out a commercial mortgage. Mortgages are usually for 15 years or more and the property itself is at risk if payments are not made on time.
Commercial mortgages can be used for a variety of purposes. For example:
Most banks and building societies offer commercial mortgages. But you must satisfy the lenders' criteria. Some lenders may accept applications where there is an adverse credit history, but most require a positive personal credit rating and clear evidence that your business is creditworthy.
It also depends on:
your business circumstances at the time
the long-term projections for your business
Some lenders impose restrictions on the uses of commercial premises. Certain
business concerns may be excluded altogether.
Buying vs Renting
Choosing to buy your own business premises is a major step. You should weigh up whether it might be better to buy or to rent.
There are considerable advantages to buying:
There are also disadvantages:
When commercial mortgages are available
The terms of a commercial mortgage will depend largely on the type of business you're running and the type of premises or land you want to buy. This is a complex area and it is essential you seek specialist advice from your solicitor and possibly a chartered surveyor.
There are many reasons why you might need a commercial mortgage. For example, if you are starting-up, or buying an existing business that is tied into the property, such as:
Or you might be an established business seeking to expand and therefore looking for larger premises, such as:
What lenders need to know
Your business needs to be on a relatively secure financial footing before you can apply for a commercial mortgage. This is certainly something any lender will want to discuss.
A lender's main concerns are that:
You should therefore prepare thorough and accurate figures showing a full history of your earnings and your estimates for the future.
You will almost certainly need a deposit of 20-30 per cent of the purchase price. When buying a property for your business, you will probably need to supply the following information:
When buying a business and property combined, you will probably need to supply the lender with additional information, such as:
Do not over-estimate the value of a property. A lender will almost certainly appoint a surveyor or property appraiser to inspect and estimate the value of the premises.
Different types of lender
Though it's always worth checking, high street banks and building societies are not necessarily the best place to start looking for a commercial mortgage. However, the major banks usually run advisory services, which may be helpful.
You can save both time and money by finding a specialist lender who understands the specific needs of your industry. Small businesses should always aim to get the right finance at the right price.
Using brokers
Finding a lender yourself can take time. A broker will do the job for you. Quite often their commission is paid by the lender.
Arrangement fees are still applicable to a mortgage, irrespective of brokers' commissions - see the page in this guide on how much it all costs.
Many commercial finance brokers have special offers for different business sectors, including:
How the money gets paid back
Commercial mortgages carry higher interest rates than residential loans because you are considered a higher risk.
The term of the loan is at the discretion of the lender. It will almost certainly be less than the standard 25-year mortgage for domestic property, and can be as short as ten years in some cases.
The interest rate you get is based on the lender's assessment and might be between one per cent and six per cent above the Bank of England base rate.
There are two interest rate options - variable or fixed.
Most commercial mortgage schemes have variable rates. This means that the interest rate varies in line with the Bank of England base rate. Your repayments may rise or fall, and you should budget accordingly.
A fixed rate means your repayments:
Repayment methods
With a repayment mortgage - sometimes called a capital and interest mortgage - each month you repay a portion of the loan and the accrued interest.
An interest-only mortgage means only the interest is paid off with each monthly payment. You must have an accompanying policy, such as those featured below, that must mature at a value close to the outstanding lump sum.
An endowment mortgage provides life assurance cover and a fixed payment for investment. This is a risky method of repayment, as it depends on the performance of stock markets.
You can use an Independent Savings Account (ISA) as a repayment method, although ISA rules are subject to change. Borrowers should seek advice from a suitably qualified financial adviser.
A pension plan mortgage entails payments made into a pension fund that repays the mortgage on maturity. Again, you should seek specialist advice if considering this repayment product.
How much it all costs
Obviously, interest rates vary according to the lender and the repayment options
you choose - see the page in this guide on how the money gets paid back.
There are certain factors you ought to consider:
Next steps: find lenders online
By searching online you can access hundreds of lenders and get instant quotes
and advice. However, if you are interested in a quote you get online, it's
a good idea to telephone the lender in person as you may get a better deal
and can confirm details.
It can sometimes be advisable to seek specialist advice on what sort of mortgage will be best for you. Search for specialist commercial finance brokers on the National Association of Commercial Finance Brokers' (NACFB) website.
It's worth noting that all good lenders must adhere to the code of practice issued by the Mortgage Code Compliance Board (Mortgage Board). Read about the Mortgage Code on the Mortgage Board website.
Business Link Helpline
0845 600 9006
Royal Institute of Chartered Surveyors Enquiry Line
0870 333 1600
Related guides on businesslink.gov.uk
Book a course on Finance for Non-Financial Managers through our Training Directory
Loans and overdrafts
Borrow money tax efficiently
Decide whether to lease or buy
Buying or renting business premises
Use your business plan to get funding
Choose and run a business account
Choose the right finance type for your business
Choose and manage a business adviser
Get the right financial help and advice
Download a director's briefing on buying premises at the Institute
of Directors' website (PDF)
http://www.iod.com/intershoproot/eCS/Store/en/images/IOD_Images/pdf/pr4buy.pdf
Download a director's briefing on renting premises at the Institute
of Directors' website (PDF)
http://www.iod.com/intershoproot/eCS/Store/en/images/IOD_Images/pdf/pr3rent.pdf
Search for specialist commercial finance brokers on the NACFB website
http://www.nacfb.org/choose_broker.asp
Read about interest rates on the Bank of England website
http://www.bankofengland.co.uk/Links/setframe.html
Read about the Mortgage Code on the Mortgage Board website
http://www.mortgagecode.org.uk/aboutus/ourrole.asp?area=con&version=0
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