Commercial Mortgage FAQ
FAQ on commercial mortgage lending
As the name suggests, a commercial mortgage is a specialist type of mortgage issued for the purchase of land or property for business purposes. Also referred to as business mortgages, commercial mortgages are available for investors, sole traders, limited companies, partners, and anyone running a formally registered business in the UK. Like a traditional mortgage, the commercial property being purchased by the applicant is used as security (or collateral) for the loan, with the lender retaining a stake in the property until the loan is repaid in full.
All lenders have their own policies when it comes to minimum and maximum loan sizes available. As a rule of thumb, you can expect to be offered anything from £10,000 up to £40 million or more, depending on your requirements and the value of the property you intend to purchase. Loan to value (LTV) is typically limited to no more than 80% of the total value of the property, though some commercial property finance specialists offer funding up to 100%, with additional security. As with a traditional mortgage, commercial mortgages are usually repaid over a period of 5 to 30 years.
You will usually be able to choose from several different types of commercial mortgages, which include interest-only mortgages, capital repayment mortgages and hybrid commercial mortgages. You will also be able to choose between commercial variable rate mortgages and commercial fixed rate mortgages:
- Commercial Variable Rate Mortgages – The interest rate changes according to the Bank of England base rate, as determined by the lender.
- Commercial Fixed Rate Mortgages – An agreed interest rate remains fixed for a set period (usually 2 to 5 years) before switching to a variable rate.
The specific benefits differ from lender to lender, though some of the general benefits of a commercial mortgage include the following:
- Payments on a commercial mortgage are usually equal to or less than the equivalent rent payment for the same property.
- All interest chargeable on a commercial mortgage is tax deductible and can be included in your annual returns.
- Commercial properties are just as likely to increase in value as residential properties in high demand locations.
- By purchasing a commercial property, you eliminate the risk of facing excessive rent hikes, supplementary bills in the future& being asked to leave and relocate an established business.
The following disadvantages should be considered by anyone considering a commercial mortgage:
- Most lenders ask for large down payments, which could be anything from 10% to more than 30% of the property’s value.
- Variable interest rates can decrease or increase over time, making it difficult to budget accurately and control costs.
- Commercial properties, like any other property, may decrease in value, reducing the value of your commercial assets in the process.
In most respects, commercial mortgages and residential mortgages are practically identical. At least, in the sense that you are looking to secure funding for a property you wish to purchase, for which a deposit is required followed by a series of repayments until the outstanding balance is repaid in full. One of the biggest differences between commercial and residential mortgages is that there are significantly fewer specialist lenders in commercial property loans. In addition, the criteria that must be fulfilled to be considered eligible for a commercial loan are different to those that apply to a home loan. Lenders may also be selective regarding the types of commercial properties they are willing to lend against, which is worth considering before applying. In terms of affordability, commercial mortgages can be extremely advantageous as all interest charged by the lender can be written off as a business expense.This can significantly reduce the overall cost of the loan – an advantage that does not apply to traditional residential mortgages.