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.
Interest rates vary significantly from one lender to the next and can shift at any time. As a general guide, most applicants can expect to be offered commercial mortgages with interest rates of between 2.2% and 5.5%.
Comparing the market in its entirety with the help of an independent broker is essentialto ensure you get the best possible deal at the lowest rate of interest.
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.