A Guide To Commercial Mortgages
A Guide to Commercial Mortgages
In this blog we look in detail at commercial mortgages and how they differ from residential mortgages, as well as providing some guidance around the application process and answering some of the most common questions regarding commercial mortgages.
What is a commercial mortgage?
Where a residential mortgage applies for buying a property that you will live in, lending to buy a property that you will not live in is classed as a commercial mortgage. The purpose of a commercial mortgage will usually be to purchase business premises, although buy-to-let mortgages also come under the bracket of commercial mortgages.
Property developers often use commercial mortgages sometimes referred to as ‘bridging’ loans, to cover the period from buying property, through the renovation time and then paying it off when the property developer sells the property.
How commercial mortgages differ from residential
Commercial mortgages will usually run over a shorter period of time and will incur higher interest rates than a residential property mortgage. It is important to note that Stamp Duty is applicable on non-residential properties and buy-to-let properties, so you should check how much you will need to pay, depending on the property value. Most commercial mortgages are variable rate, whereas with residential, you can choose between fixed rate, tracker and variable rates.
Finding the best commercial mortgage deal
Commercial mortgages can be more complex than residential ones, especially when it comes to providing financial details and business director details. You may also need to provide asset and liability statements and business performance figures. So, a good starting point is to speak to a specialist commercial mortgages broker who will be able to help you to find the best deal in relation to your specific circumstances and talk through your options.
How much can I borrow?
Again, the process is quite different between ascertaining how much you can borrow for a commercial mortgage and how much you would for a residential one. A lot of lenders will only lend up to 75% of the property value (75% LTV). Also, there are often minimum lower limits on the amount you can lend. Other factors will come into play, depending on the purpose of the mortgage, e.g. if you are buying the property to rent it out, the projected rental income will be a key consideration.
Complications with getting definite rates
Lenders can be much more strict regarding lending criteria and it may also be difficult to find a definite rate, as they take more factors into account than with residential mortgages. They will want to assess the risk in great detail and therefore will ask for certain documents and details regarding your business. There is a different approach in assessing levels of risk, therefore you may find it difficult to find out exact rates but it will help to speak to a broker to give you a better idea of what rates are available, related to your circumstances.
What can be used as security?
If you do not have the cash deposit that a lender requires then you may be able to offer other assets to use as security. Typically, this would be another property that you have equity in or shares, for example.
Leasehold property can be more difficult to get a mortgage for, particularly if there is less than 70 years left on the lease. If this is the case, you will usually need some form of security to be granted the mortgage.
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How refinancing your mortgage works
Just like with residential properties, if you have equity in your property then you can apply to remortgage it to release the equity. Essentially, what you are doing is paying off one mortgage and then taking out another one that provides you with some released funds that you will pay off as part of the new mortgage deal. Even if you are not looking to release any equity, it is a good idea to regularly check the market to see if there are any better deals that can save you some money on interest rates.
Should I use a broker for commercial mortgages?
With commercial mortgages being more complicated than other types of mortgages, working with a specialist broker will enable you to use their market knowledge in order to get the most suitable kind of deal. Your broker will negotiate dealings with the lenders and will be able to direct you in terms of what paperwork is required and the other essential details relating to the commercial mortgage application process.
What costs are payable?
There are a number of costs that you may need to pay for the mortgage application, including:
Broker fees – A broker will often charge a fee for working on your mortgage deal, which can be around 1% of the mortgage.
Arrangement fees – Lenders usually charge an arrangement fee for the mortgage, in the region of 1%-2% of the loan amount.
Valuation fees – Because business premises have a lot more variability, a valuation of the property will usually be required before any mortgage will be agreed. The valuation fee on a commercial property will usually start from about £500 upwards.
Legal fees – There will also be legal fees involved which again is likely to be at least £500 and you will also be required to pay for the legal fees accumulated by your lender.
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