Commercial Mortgages

A commercial mortgage is a loan used to purchase or refinance a business premise. The demand in the market for commercial mortgages is high, even after a two year global pandemic. Many business’ are still looking to open new offices, restaurants and shops. This leaves the market open for investors and owner-occupiers to search for finance to purchase these commercial premises.

Commercial mortgages are in a space of their own, lenders aren’t restricted to following ridged guidelines that many of the residential mortgage lenders would have to follow.

Why don’t they follow the same rules?

Commercial mortgages are (in the most) unregulated deals. Whilst being unregulated means they aren’t covered by the Financial Services Compensation Scheme, this also means they don’t have to follow the FCA’s lending and affordability guidelines, which allows lenders to have much more control over what type of business they can offer and the terms that they can set.

How much can I borrow for a commercial mortgage?

Each lender will have their own method to calculate the exact amount you would be able to borrow but this is usually based on an assessment of you, your firm and your loan objectives.

Many lenders offer bespoke deals on commercial business which is tailored to you and your objectives, but overall, the loan amount will be dependent on Earnings Before Interest, Tax, Depreciation and Amortisation or EBITDA. If there isn’t sufficient profit to cover this, then some lenders may allow you to declare other legal forms of income that they can then include in the affordability calculation.

EBITDA – Earnings Before Interest, Tax, Depreciation and Amortisation. This essentially shows how profitable and sustainable your company is and any potential liabilities there might be. The calculation ignores interest expenses, taxes or intangible assets, therefore giving the lender a more accurate indication of the profitability of the business as a whole.

Lenders will want to see that there is going to be demand in the future for your business’ product or service, that it turns a good profit and that it has a good track record of income from previous years as well as an appropriate reason for owning a commercial property.

If you are purchasing the property to let, they will want to see that the monthly rental payments will provide between 100%-190% coverage, although some may require less with a lower loan to value.

How much deposit do I need for a commercial mortgage?

In most cases, commercial lenders will ask for a 25-40% deposit. It may be possible to get up to 100% loan to value (LTV) with some lenders if you are able to put down additional security, such as other properties with enough equity in them or assets that hold their high value.

As always, the higher the deposit you intend to put down the better your chances are of being able to secure the mortgage you want and potentially securing more favourable interest rates.

Buying as an investment or as an occupier?

There are 2 types of commercial mortgages – Commercial Owner-Occupied Mortgages and Commercial Investment Mortgages.

Purchasing a commercial property to let can be a very lucrative investment opportunity, with the ability to charge higher rents and to potentially more than one business, the income that can be generated is vast. Although many businesses are trying to incorporate working from home into their business models, many others are still pushing for the office working environment. The demand for office space is still as present as it was before COVID, in some cases the demand is higher and for even more space to create better environments for their employees.

With that being said, there is an ever-growing list of lenders joining the commercial lending space, with many offering highly competitive rates and deals, many of which are bespoke on commercial mortgages over £500,000.

Fixed and variable rates are available, your broker will be able to discuss the different options with you and will help you understand what makes the most sense for you and your business. In the same way that they would for a residential mortgage, you would be required to make monthly repayments to your lender which would be covered by the income generated from the business or from the rent that you receive – depending on if you have bought the property as a rental or for your own business.

How long can I have a commercial mortgage for? What term?

Commercial mortgages can be arranged for short term loans or longer terms. Most tend to run for 5-10 years but we can source deals ranging from 12 months up to 25 years to fit your specific situation. In some cases when short term finance is needed, a commercial bridging loan may be used, your adviser will assist you to find the most appropriate type of lending for your unique circumstances.

How fast can I get a commercial mortgage?

Speed is often key in the commercial property space. Often opportunities arise suddenly and having access to get finance quickly is key to not missing out. Like with bridging finance, lenders can work very fast to get you the finance you require.

At Veracity, we can source a deal in as little as 24 hours after an initial conversation with one of our advisers. If you need to get finance quickly, feel free to contact us so we can discuss your commercial finance objectives.

What types of property can I get a commercial mortgage on?

Commercial mortgages can be secured on most business premises including warehouses, offices, pubs, gyms, hotels and many more.

What costs are involved in a commercial mortgage?

It’s no secret that commercial mortgages are expensive, from lender arrangement fees, valuations and broker fees, the cost of setting one up is far more than just the monthly mortgage payments.

Arrangement Fees: Most, if not all, lenders will charge an arrangement fee which is charged for setting up the mortgage account with them. This fee covers administrative costs that the lender might have and is usually used to pay the broker their commission. The charge is usually between 1-2% of the loan amount up to £1 million although some smaller loans can come with higher arrangement fees.

Broker Fees: Whilst brokers earn a commission from the lender, they will usually also charge their own broker fee. The commission earned from the lender is paid by the lender for doing any necessary work on the lender’s behalf as well as bringing the business to them. The broker’s fee is paid by the client and is charged for the admin work done on the client’s behalf, sourcing the best deal for the client and for offering the client advice. Many brokers charge a fee of 1% of the loan amount although at Veracity we charge a fee of 0.5% of the loan amount on loans over £500k (check our full corporate fee structure here). We believe that we can still offer our clients a premium service whilst charging a fair and competitive fee.

Valuation Fees: Many residential mortgage deals don’t require you to pay a valuation fee but with commercial mortgages, you are usually expected to finance the cost of the valuation. These vary from lender to lender and can often change in price dependent on the property’s value  

Legal fees: In most cases, you will be required to pay for your own and the lender’s legal fees which are around £500 for each party typically.

Refinancing your commercial property

The process of refinancing your commercial property works in the same way that arranging a new commercial mortgage would. You may be able to release some equity from the security to fund a new investment or business project.

Why choose Veracity?

Here at Veracity, we can secure finance for most scenarios, including commercial, regulated and unregulated bridging loanshigh-value residential mortgages and Buy to let mortgages. We have an unrestricted network of high-street, specialist and private lenders who can offer our clients the best deals on the market.

We will negotiate terms and rate for your finance needs, in some cases, lenders will offer us bespoke deals for our clients depending on the type of deal and the individual’s circumstances. Our advisers will work with you to find the most appropriate deals and explain to you any potential risks involved as well as the benefits.

Your adviser will work on your behalf to submit any necessary paperwork needed to apply for the chosen deal and ensure any of your questions are answered in a timely manner.

We charge 0.5% of the loan amount for complex deals over £500,000 and for most deals that are placed with private banks or some specialist lenders – To read our full Corporate Fee Structure click here.

If you have a corporate project that you wish to discuss, then contact us.

ABOUT THE AUTHOR

Picture of Woody Snapper

Woody Snapper

Woody works with individuals and business' looking for corporate finance, high net worth mortgages, complex loans, bridging loans and development finance.

To contact Woody.

Tel: 07922 413586

or

Email: woody@veracityfp.co.uk