Simply said, a commercial mortgage is a loan taken against a property which is used for business purposes rather than residential living. This could be anything from a small shop to a large scale industrial business. While residential mortgages are rather easy to obtain and manage, commercial mortgages usually involve larger loan amounts and have stricter lending criteria.

Let’s take a look what a commercial mortgage offers and who it can work for you

What are commercial mortgages?

Similar to a residential mortgage, a commercial mortgage allows you to borrow money to purchase a property, but for intended business purposes. You could be setting up a new business or expanding an existing one. Whatever the case maybe, commercial mortgages are probably a wise option to consider when expanding your property footprint. Usually commercial mortgages have higher value for the property as the extent of the property could be larger than a residential property. You repay the mortgage over an agreed period, usually for an average term of about 15 years.

Key differences between commercial and residential mortgages:

Loan amount: Commercial mortgages often involve significantly larger sums unlike residential mortgages.

Repayment terms: As mentioned above, commercial mortgage terms have an average repayment term of about 15 years. However, they could be longer, even up to 25 years.

Interest Rates: Commercial interest rates are generally higher than residential rates due to the higher risk involved. Unlike residences, businesses are volatile and it can be a gamble to see it succeed. Therefore, the risk of its success or failure will be considered by the lender. In addition some businesses can pose more risk than others. Therefore interest rates on commercial mortgages are higher than residential mortgages.

Lending Criteria: Lenders have stricter requirements for commercial mortgages, focusing on the property's income-generating potential rather than the borrower's personal financial situation.

Who Needs a Commercial Mortgage?

If you are a business owner, you are on the top of the list of those needing a commercial mortgage. The purchase of a premises for business operations and expansion will be a priority. And getting yourself a commercial mortgage will not only ensure a larger premises to run your venture, but also could prove to be profitable in the long term. After all, you pay off your mortgage while continuing to make profits, provided of course that your business is successful with its expansion plans.

Investing in properties with commercial value for the future is another way to put a commercial mortgage to good use. Purchasing a property that is located in a sought after business section of a city, for instance in London, is a great investment.

The Commercial Mortgage application process in the UK

Although lenders may have their own way of processing a commercial mortgage, here is a generally accepted process of applying and getting commercial mortgage.

1. If this is your first commercial mortgage, you may want to speak to a mortgage adviser. Their expertise will be able to assess your financial situation and guide you.
2. In the event your application is accepted, you will then receive a quote from the lender along with other requirements to submit a full application.
3. Once the forms and application is submitted along with a report, the lender will want to personally meet with you.
4. The next step would be where the credit committee and underwriters will sign to approve the application as acceptable to the lender.
5. Following this, the lender will then issue the formal offer, valuation and proceed with the legal work.
6. A surveyor will be instructed to carry out a comprehensive valuation report. This may take more time than a residential mortgage.
7. Legal matters will be carried out by your solicitor to satisfy all stipulated conditions of the agreement, making sure you fully understand the loan and what it includes. Choosing a solicitor who is well versed in commercial mortgages is important. Their understanding about the subject matter can make the difference between getting the mortgage quickly or it getting delayed.
8. Once all this is done, your commercial mortgage will be released.

Some factors that may affect a Commercial Mortgage eligibility

Credit Score: A good business credit history is crucial. This will determine if the lender is willing to go ahead with the mortgage or not.

Deposit: A larger deposit can improve your chances of securing a mortgage and obtaining a better interest rate.

Loan-to-Value (LTV) Ratio: This is the percentage of the property's value that the lender will finance. Commercial LTVs are typically lower than residential. This is due to the higher risk a business faces.

Property Type and Location: The property's potential to generate income is a key factor. Higher income generating businesses will have a better chance of getting a commercial mortgage through than a lower income generating venture.

Business Plan: A well-structured business plan demonstrating your financial management and strength is essential.

Securing a commercial mortgage in the UK may seem like a complex process, but understanding the processes and what or how lenders look at business, key factors and being prepared can increase your chances of success rate.

Conclusion

While commercial mortgages and residential mortgages share similarities, they are set apart with some conditions such as commercial mortgages which are focussed 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 informed decisions on your next property purchase.

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

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 25.09.2024

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BVS Mortgages & Financial Services Ltd is an appointed representative of Commercial Finance Brokers UK Limited which is authorised and regulated by the Financial Conduct Authority (FRN 736199) for the purpose of consumer credit business. Commercial Finance Brokers UK Limited is registered in England & Wales under company registration number 06353973. We are a broker, not a lender. We work with the whole of market and may earn a commission from lenders, this amount varies between lenders