What is a Commercial Mortgage? A Detailed Guide

If you’re looking to finance a property for business purposes, understanding the ins-and-outs of a commercial mortgage is a must.

Commercial mortgages, (also known as business mortgages), are for business owners who want to buy property or land for commercial use. Whether you’re a business owner expanding your operations, or an investor looking for your next project, knowing the key details of a commercial mortgage definition will help you make confident, informed decisions.

With so many providers out there, comparing commercial mortgage deals can be tricky, especially if you are new to this type of financing. Fear not, we’ll run through what to look for in the information below. 

So, if you find yourself asking “What is a commercial mortgage?” or, “Is a commercial mortgage right for me?” then read on to find out more.

What is a commercial mortgage?  

In short, a commercial mortgage is a loan used to purchase, refinance, or refurbish property for business purposes. Unlike residential mortgages, which are designed for personal home purchases, commercial mortgages are tailored for business-related real estate investments.

• Purpose: Residential mortgages finance homes, while commercial mortgages fund properties like offices, warehouses, and retail spaces.
• Loan Size: Commercial mortgages typically involve larger sums.
• Repayment Terms: Interest rates and repayment structures differ, often reflecting higher risks in commercial lending.

The main difference between a commercial mortgage and a residential mortgage is that the value of the land or property is usually much higher. Commercial mortgages are typically loans secured against a property that is not your residence, for example, if you plan to buy a property to rent out for extra income, you will need a commercial mortgage. However, you can also get a bridging or development loan against a property that is not your main residence but is “residential” in nature.

How does a commercial mortgage work?  

The process of obtaining a commercial mortgage involves several steps, from application to approval. Here’s how it generally works:

1. Application: You provide details about your business, financial history, and the property in question.
2. Assessment: Lenders evaluate your application, considering factors like credit history, income, and the property’s potential.
3. Approval: Once approved, funds are released, and you’ll start repaying the loan based on agreed terms.

Loan terms for commercial mortgages can vary significantly, with repayment periods ranging from 5 to 25 years. Interest rates may be fixed or variable, and lenders often set specific repayment schedules to match your business’s cash flow. You can check out the best real-time rates and terms available to you through our comparison tool here.

Types of Commercial Mortgages  

There are two main types of commercial mortgages: Owner-Occupier and Investment Mortgages.

1. Owner-Occupier Commercial Mortgages

This type is for business owners who want to buy a property to use for their own business. Whether it’s an office, shop, or warehouse, it’s a great way to avoid renting and have full control of your business space.

2. Investment Commercial Mortgages

These are for those looking to buy property as an investment. You purchase a property, lease it out to tenants, and generate rental income. It’s a smart move if you want to grow a property portfolio or make money from rental returns.

Each option works differently, so talk to your broker, who will be able to find the best commercial lender that caters to your project goals!

Deposit amounts and associated fees  

Commercial mortgages usually require larger deposits than residential ones. Typical deposit requirements range from 20% to 40% of the property’s value, depending on factors like:

• Property type
• Purpose of the loan
• Lender criteria
• Loan-to-value (LTV) ratio

Common Fees Include:

• Arrangement fees: Charged by the lender, typically 1-2% of the loan amount.
• Valuation fees: For assessing the property’s market value.
• Legal fees: Covering contract preparation and review.
• Interest rate: Can be fixed or variable and reflects the actual cost of borrowing money.

While the upfront costs of a commercial mortgage may seem higher, the long-term benefits of property ownership often outweigh the initial expenses.

Eligibility criteria: Can anyone get a commercial mortgage?  

Not everyone qualifies for a commercial mortgage. Lenders will assess several factors to determine your eligibility, including:

• Credit History: Both personal and business credit scores are evaluated. A strong credit profile increases your chances of approval.
• Financial Stability: Your income and profitability record are critical. Lenders want to see a consistent and reliable financial history that indicates your ability to repay the loan.
• Business Type: Certain industries may face stricter lending criteria due to perceived risk.
• Deposit Size and LTV Ratio: A larger deposit often increases approval chances and may help secure more favourable loan terms.
• Property Type and Usage: Lenders will consider whether the property is owner-occupied or an investment and whether it meets their criteria.
• Debt-to-Income Ratio: A manageable level of existing debt relative to your income is crucial for approval.

Before you dive into your search, make sure you have the right documents ready to make your application smooth and successful. Here’s what you’ll need:

• Recent bank statements, plus records of your liabilities and assets
• Current and projected performance figures
• Details about your partners and directors
• Tax returns from the last three years

Once you have your documents in order, consider speaking to a mortgage broker or financial advisor who can guide you through the process and help you identify the best lenders for your needs. Keep in mind that different lenders have different criteria, so shopping around can improve your chances of securing favourable terms.

It’s also essential to review your financial health before applying. If your credit score needs improvement or your business finances are unstable, taking steps to strengthen these areas before submitting an application can make a significant difference.

Finally, be prepared for the due diligence process. Lenders may request additional information, so staying organised and responsive will help ensure a faster and smoother approval.

As a side note, Brickflow’s DIP tool allows you to input the required information in once rather than having to constantly fill out applications to different lenders. Simply fill out the information and send to all lenders in one go.

Types of businesses that use commercial mortgages  

Many businesses rely on commercial mortgages to fund their property needs. Common examples include:

• Retail Shops: Retail complexes & high-street stores.
• Office Spaces: From startups to large corporations.
• Warehouses: Storage facilities for goods and logistics.
• Hospitality Venues: Hotels, restaurants, and event spaces.

A commercial mortgage can be offered for most businesses, however, whether or not an application will be approved depends on the ability to demonstrate how viable that business is.

The application process for a commercial mortgage  

Applying for a commercial mortgage can seem daunting, but it’s straightforward with the right preparation:

1. Prepare Financial Documents: Gather financial statements, business plans, and proof of income.
2. Choose a Lender: Do your research and use platforms like Brickflow to compare rates.
3. Submit Application: Provide all necessary information for lender review.
4. Underwriting and Approval: Lenders assess risks before granting approval.
5. Completion: Once approved, funds are released, and repayment begins.

Using an intermediary or a platform like Brickflow not only simplifies this process, but it also speeds up and ensures that you have access to the most competitive deals (compare from over 100+ lenders in minutes).

Features and benefits of a commercial mortgage  

Commercial mortgages offer several advantages for businesses, including:

• Business Expansion: Secure premises to grow your operations.
• Asset Ownership: Build equity over time and benefit from potential property value appreciation.
• Tax Benefits: Interest payments may be tax-deductible.

Alternatives to a commercial mortgage  

If a commercial mortgage isn’t suitable, consider these alternatives:

• Bridging Finance: Short-term loans for urgent property purchases.
• Development Finance: For large-scale construction projects.

Brickflow: Revolutionising the Commercial Mortgage Application Process  

At Brickflow, we simplify the commercial mortgage process by providing access to a wide range of lenders and competitive rates. Our platform allows you to compare options in minutes, saving you time and effort.

Why Choose Brickflow?

• Efficiency: Find and secure the best deals quickly, selecting from from high street banks to specialist boutique lenders.
• Transparency: Clear insights into rates and terms.
• Convenience: Whether it’s our streamlined DIP process or finding the best deal for you, Brickflow takes a process that could traditionally take weeks or months and cuts it down to a few minutes.
• Support: Whether it’s our property finance expert or our hard-working customer support team, we’re here to help every step of the way.

Achieve Your Goals with a Commercial Mortgage

Understanding what a commercial mortgage is and how it works is crucial for any business or developer looking to invest in property. With Brickflow, finding the right mortgage for your needs has never been easier.

Ready to get started? Explore your options with Brickflow today.

FAQs:

1. Can I get a commercial mortgage on a leasehold property?

Yes, you can, but most lenders require the lease to have at least 70 years remaining.

2. Are there any limits to the kind of business I can run?

A commercial mortgage is available for most legal businesses. However, if your business seems like a high risk or a poor investment, you may find it harder to secure funding.

3. How long does it take to get my mortgage approved?

The timeline can vary depending on the lender and your circumstances, but with Brickflow, things move fast. Our record for securing a Decision in Principle (DIP) is just 6 minutes!

4. What other fees come with a commercial mortgage?

When applying for a commercial mortgage, there are additional costs to consider, including:

• Legal fees, such as surveys and insurance
• Loan arrangement fees
• Valuation fees