A commercial mortgage is a loan used to purchase, refinance, or develop properties intended for business operations. These properties can include offices, retail spaces, warehouses, and industrial units. Commercial mortgages are vital for businesses looking to invest in real estate, expand their operations, or develop new properties.
If you aren’t sure if you need a commercial mortgage, then get in touch, it could be worth reviewing your options for a residential or Buy to Let mortgage before you decide.
1. Purpose: Used for purchasing, refinancing, or developing business properties.
2. Term Length: Typically ranges from 3 to 25 years, depending on the lender's terms.
3. Interest Rates: Can be fixed or variable, usually higher than residential mortgage rates due to the increased risk.
4. Loan-to-Value (LTV): Generally lower than residential mortgages, typically around 60-75%.
5. Repayment Structures: Options include interest-only or capital and interest repayments.
6. Tax Deductibility: Interest payments on commercial mortgages may be tax-deductible as a business expense, but you should seek advice on this particular point.
Common Uses of Commercial Mortgages
1. Property Purchase
Businesses can use commercial mortgages to buy premises for their operations, such as offices, retail stores, or industrial units.
2. Expansion
Looking to grow? Companies can use commercial mortgages to purchase additional properties and expand their operations.
3. Refinancing
Refinance an existing commercial mortgage to secure better terms or release equity tied up in the property.
4. Development Projects
Fund new developments or major renovations to existing commercial properties with a commercial mortgage.
5. Investment
Investors can use commercial mortgages to purchase rental properties, such as office buildings or shopping centres, to generate rental income.
Lender Requirements
1. Security
The property being purchased or refinanced is used as collateral. A professional valuation will be required to determine its market value.
2. Business Plan
Lenders often require a detailed business plan outlining the property’s use, projected income, and loan repayment strategy.
3. Credit History
Both the business and its principals need a good credit history. Lenders review financial statements, credit reports, and payment histories.
4. Income Evidence
Proof of the business’s income and profitability is essential. This typically involves financial statements, tax returns, and profit and loss statements.
5. Deposit
Borrowers usually need to provide a deposit, typically between 25% and 40% of the property’s value.
6. Debt Service Coverage Ratio (DSCR)
Lenders assess the DSCR to measure the business’s ability to cover its debt obligations. A DSCR of at least 1.25 is often required, indicating that the business generates 25% more income than necessary to cover loan payments.
7. Personal Guarantees
Lenders may require personal guarantees from business owners or directors, especially for smaller or less established businesses.
Types of Commercial Mortgages
1. Owner-Occupied Mortgages
For businesses that plan to use the property for their own operations.
2. Commercial Investment Mortgages
For investors purchasing property to rent out to other businesses.
Advantages of Commercial Mortgages
1. Tailored Financing: Terms can be customised to suit the specific needs of the business.
2. Expansion Opportunities: You can access funds to expand business operations or purchase new properties.
3. Tax Benefits: Interest payments on commercial mortgages can often be deducted as a business expense.
Disadvantages of Commercial Mortgages
1. Stricter Requirements: More stringent lending criteria compared to residential mortgages.
2. Higher Interest Rates: Reflecting the higher risk involved in commercial lending.
3. Increased Risk: If the business fails to meet repayment obligations, it could lose the property used as collateral.
Final Thoughts
Commercial mortgages are a crucial tool for businesses looking to purchase, develop, or refinance properties. They offer flexible terms and can be tailored to meet the unique needs of each business. However, they come with stricter requirements and higher risks compared to residential mortgages. It’s essential to carefully assess your business's financial situation and prospects before proceeding.
If you think a commercial mortgage might be the right solution for you, we recommend you get specialist advice to help you understand the process and find the best option for your needs.
At L&C Mortgages, we specialise in a wide range of mortgage products, but we do not advise on commercial mortgages. To ensure you receive the best guidance and support for your project, we have partnered with Propp, an expert in specialist property finance. Propp is an award-winning specialist mortgage broker with extensive knowledge and experience to help you secure the right funding tailored to your specific needs.
Important Note on Broker Fees
Unlike L&C Mortgages, Propp does charge a fee for its service. For expert advice on commercial loans, we recommend you contact Propp, who will clearly explain their fees and service before you commit to using them.
Specialist mortgage advice is provided by Propp, who are authorised and regulated by the Financial Conduct Authority (914408). Propp is not a part of L&C, nor is L&C a part of Propp.
L&C receives a % of the commission that our partner Propp earns. All applications are subject to lending and eligibility criteria.
Propp is a credit broker, not a lender, that works with the whole of the market.
The FCA does not regulate commercial mortgages.
