What is a commercial mortgage? [Everything you should know]

16/03/2020

What is a commercial mortgage?

A commercial mortgage is used for the purchase or refinance of a commercial property. This is a secured loan held against the property.

This type of mortgage is often used to purchase premises from which to trade, rather than paying rent.

Key things to consider:

  • Level of deposit

Different lenders have different expectations. Generally, you should be prepared to put down 20-25% of the purchase price as a deposit. The higher the deposit, the lower the amount being borrowed. This may reduce your interest rate too.

  • Monthly repayments

This will ultimately be determined by the amount borrowed, the interest rate and also the term of the loan. However, you should consider what the business can afford each month. If you are currently renting, then this could be a useful starting point as these funds can be used to service the borrowing instead.

  • Reasons for refinancing

Depending on what you need the funds for, refinancing your commercial mortgage may not be the most appropriate method. For example, a cash injection could be better achieved through a loan. A commercial mortgage is also a long-term commitment so not the best option for a quick fix.

  • Pension

You may be able to make use of existing pension arrangements for a commercial mortgage or refinance. The right type of pension scheme can own commercial property; your pension funds could be used for the purchase, plus the scheme can borrow to help fund the purchase.

And don’t forget: as with any secured borrowing, the property may be repossessed if you do not keep up repayments.

What information will I need to provide to a lender?

  • Details of the property you own or want to purchase.
  • Confirmation of your deposit funds if purchasing.
  • The last three years of full financial statements for the company/business.
  • Six months’ worth of bank statements for the company/business.
  • Information about what you intend to use the funds for if refinancing.

What is the commercial mortgage or loan interest rate? 

There is no typical rate for commercial loans or mortgages – they vary from lender to lender. The rate you are offered depends on your individual circumstances.

Factors lenders consider:

  • The amount of deposit.
  • The amount of equity you have in a refinance property.
  • The loan or mortgage term.
  • The business’s ability to service the debt.

What is the difference between a consumer loan and a commercial mortgage?

A consumer loan concerns your own finances. It is personal debt taken on to purchase goods and services. A commercial mortgage is debt specifically for the purchase or re-mortgage of commercial property.

What are the pros and cons of a commercial mortgage? 

Advantages

  • Your mortgage payments can directly replace your rental payments. Servicing your borrowing may have minimal impact on your outgoings if you are already renting. Plus, this way your money is being used to acquire a property rather than lease it.
  • Your interest rate can be a pro or con depending on the structure. A fixed rate can provide assurance about your monthly costs and will be unaffected if interest rates increase. This certainty may come at a cost with a slightly higher interest rate, however.
  • If the value of the property increases while you own it, you can benefit from capital gain.

Disadvantages

  • Commercial mortgages require a sizable deposit. So, your business will need sufficient liquidity to accommodate this.
  • While a fixed rate of interest offers reliability, a variable rate is at the mercy of any changes. If interest rates fall this could be beneficial, but if they rise your payments rise as well.
  • If the property value decreases this could impact your ability to sell or borrow further funds.

How do commercial mortgages work? 

At its core, a commercial mortgage works like any other secured loan. A lender will provide funding for the purchase or refinance of a commercial property. The funding they give you will be determined by a number of factors, including the property value, the business’s financial status, and the equity or deposit level.

Once the credit terms have been secured a valuation of the property will take place. And finally, when everyone is happy, solicitors will provide the right documentation and finalise the transaction.

How can Prydis help?

Prydis are completely independent and are members of the National Association of Credit Finance Brokers. We have access to the entire market and can approach alternative or high street lenders to help you meet your specific needs.

Our multidisciplinary approach integrates in-house wealth, accountancy, and legal expertise to truly get to grips with the nuances of your business. This way, we can propose a funding solution which puts your business ambitions first.

We can manage the entire application on your behalf, and you can expect to be spoken to in plain English.

Next steps

You can contact us on 01392432431or alternatively visit our commercial mortgages page and submit an enquiry to an adviser.

Nick Cross

This article was written by Nick Cross

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