Businesses are economic building blocks and considered assets for the economic success in a country. If you are a businessman/woman and intend on starting a business in the UK, you are among those who could make a difference by generating much needed revenue. Starting a business means a lot of planning, logistics and of course a property.

And to do all this, you may want to look at getting a commercial mortgage. This blog outlines essential criteria lenders consider when assessing commercial mortgage applications.

What are Commercial Mortgages

Unlike residential mortgages, commercial mortgages are designed for businesses that intend to purchase or rent properties for commercial purposes. These properties could be anything from offices, retail spaces to industrial units and warehouses. Commercial mortgages typically involve larger loans and have stricter lending criteria compared to residential mortgages.

What are the eligibility factors?

Lenders look at several factors when assessing commercial mortgage applications. While the specific requirements may vary depending on the lender, the following pointers are generally considered:

1. Credit Score and Financial History

Having a clean credit history is important when applying for a commercial mortgage. Lenders will examine your personal and business credit scores. Typically they will look at your repayment patterns and if you have a history of defaulted or late payments. This is probably one of the most important factors when applying for a commercial mortgage.

2. Property Value and Location

The property's location is an obvious value indicator when it comes to the mortgage application. Lenders will also assess the property's potential to generate income, considering factors such as higher rental generation, occupancy rates, and the overall property market. For instance a property in London will have a higher value tag and potential to generate more income as a business, than a property in a less commercially active part of the country.

3. Loan-to-Value (LTV) Ratio

The LTV ratio is the percentage of the property's value that the lender is willing to finance. Typically, LTV for commercial mortgages in the UK are around 75% of the total property value. However, if you have additional collateral or property security, chances are that you could get a higher LTV.

4. Income and Cash Flow

A lender will take a close look at your business's income and cash flow to assess your ability to repay the mortgage. Having consistent and stable income is essential. It will ensure that your application is approved and not rejected.

7. Type of Property

The type of commercial property can influence eligibility. Some property types, such as office buildings and retail spaces, may be more attractive to lenders due to their potential for rental income. There is also a flip side to this.

If your business is considered ‘risky’, for instance if your property hosts a bar, or a nightclub with the risk of errant patrons. This could result in damage to the building and property, which is very real. Lenders may demand a higher deposit for commercial mortgages for such business entities. 

Improving your chances of eligibility

Getting your commercial mortgage approved may prove to be more difficult than you think. Here are a few tips that may help you overcome some of those obstacles.

Build a strong credit history: Maintaining good financial practices and promptly paying all bills and debts will certainly help. Unpaid credit card payments and pending bills can work negatively and drastically reduce your chances of obtaining a commercial mortgage.

A bigger deposit: Putting up a larger deposit can improve your chances of securing a mortgage, while getting a better interest rate.

Prepare a business plan: A comprehensive business plan will help demonstrate your understanding of the market, the business you intend to run, and your ability to generate higher income levels.

Research: Doing a bit of research about the mortgage market will help you come up with optimal offers. If you’re not sure how to compare offers from different lenders, speak to an expert mortgage adviser at BVS Finances and Mortgages. Our mortgage advisers are well versed with market rates and will be able to provide you with options that you may find profitable.

By understanding the key factors that lenders consider, you can increase your chances of qualifying for a commercial mortgage and set off on achieving your business goals.

Conclusion

While commercial mortgages and residential mortgages share similarities, they are set apart with some conditions that commercial mortgages have which are focussed more towards a business entity. In the UK and London in particular, where properties are expensive and hard to purchase using hard cash, commercial mortgages are a great way to make your property purchase. By understanding the mechanics of a commercial mortgage and how it works, you will be able to make well informed decisions on your next property purchase. Good luck!

Disclaimer: The information provided in this blog is intended for general knowledge and informational purposes only, and does not constitute financial advice.

Most commercial mortgages are not regulated by The Financial Conduct Authority.

The products and services promoted here are not part of The Openwork Partnership offering and are offered on a referral basis. The Openwork Partnership accept no responsibility for this aspect of our business. These products are not regulated by the Financial Conduct Authority.

* Approved by the Openwork Partnership on 22 Aug 2024