Commercial Mortgages

What is a Commercial Mortgage?

A commercial mortgage is a long-term loan used to fund the purchase or refinance of a commercial property. They can be used on various property types, including fully commercial, mixed-use or land. 

Examples of a commercial mortgage could be:

• Purchase of owner-occupied business premises
• Purchasing an investment commercial property (where it is rented to a third-party tenant), essentially a commercial Buy-to-Let
• Remortgaging an existing loan to raise finance for your business
• Refurbishing owner-occupied commercial premises
• The transition from property development finance once a project is built

Typical examples of commercial property include retail, leisure, office space, warehouses and storage, care homes, medical facilities, hotels, student residences, etc.

How do Commercial Mortgages Work?

Commercial mortgages work in much the same way as residential mortgages. They are a long-term finance solution that’s repaid with interest monthly, and the property being funded with the mortgage acts as security for the lender. If you default on your mortgage (stop making the payments), your lender can repossess your property.

The key difference between the two is that the serviceability of a commercial mortgage is decided by the income that the property earns (whereas a residential mortgage is supported by the borrower’s income). Where the property is owner-occupied, the loan serviceability is tested against the profitability of the mortgage.

The term of the mortgage will be decided from the outset but can be up to 30 years. Your monthly repayments will be determined by the size of your loan and deposit as well as the interest rate of the loan, which can be fixed or variable.

What Are Commercial Mortgages Used For?

• Buying property: Acquiring commercial premises for business operations
• Investment finance: Investing in property to generate income or capital gains
• Property development: Financing the development of commercial properties
• Refurbishing owner-occupied business premises: Upgrading or expanding existing business premises
• Financing essential business equipment: Buying Motor Vehicles, Machinery, and other equipment to increase business output and growth

Who can use a Commercial Mortgage?

Anyone who is looking to finance or refinance a commercial property:

• Business owners: Owning your own business premises can have benefits. Firstly, your mortgage repayments may be less than rental payments, and there may be increases in the property value. You could also benefit from the tax deductions on interest loan payments
• Property investors: buying and renting a commercial property can often generate higher returns than a residential property, and commercial tenants will typically stay longer than the average residential tenant
• Landlords with property portfolios: when the borrower owns multiple residential buy-to-let properties, HMOs (House of multiple occupancy) or multi-unit freehold blocks, or the loan is above a certain size and no longer can be accommodated by retail lenders

Limited companies, LLPs (limited liability partnerships), individuals, pension funds, and PLCs can all potentially secure a commercial mortgage. Of course, there will be criteria to meet, lending limits, deposit requirements and suitable security to secure a commercial mortgage.

Commercial vs. Residential Mortgages: Key Differences

Commercial mortgages and residential mortgages work in a similar way, but there are key differences between the two loan types. 

What Are The Different Types of Commercial Mortgages?

The two main types of commercial mortgages are:

• Owner-occupied mortgages: For businesses purchasing property for their own operations
• Commercial investment mortgages: For investors (individual or company) looking to rent out commercial property. This type of mortgage is also required for mixed-use (commercial & residential) properties, where both the residential & commercial parts are on one freehold title
  
  If you can split the title and separate the commercial element from the residential, then it is possible to split the borrowing along the same lines

Additionally and depending on the properties, commercial mortgages also cover:

• Portfolio finance: When the borrower owns multiple residential buy-to-let properties, HMOs or multi-unit freehold blocks. If all the properties in the portfolio are residential BTLs, this would be considered a BTL portfolio loan rather than a commercial mortgage

Key Features & Benefits of a Commercial Mortgage

What are the key features of a commercial mortgage?

What are the key features of a commercial mortgage?

Benefits for your business:

• Investment: Commercial mortgage repayments could be less than or similar to monthly rental payments, but your money is being invested in a property instead
• Stability: Buying your own business premises with a commercial mortgage means you’re not subject to your landlord’s decisions on the property, such as rent increases or selling
• Potential rental income: If your circumstances change, you could rent your property out to generate an income
• Better rental yields: If you’re buying a commercial investment property, it could produce a higher rental yield than residential
• Capital growth opportunities: Your commercial property could increase in value over the course of your mortgage, generating profit or equity
• Tax benefits and deductions: The interest paid on commercial mortgages is tax-deductible so it can help your business reduce its annual tax overheads

Commercial mortgage benefits:

• Long-term financing: Repay your loan over 1 – 30 years, meaning you will save money in comparison to short-term financing such as bridging loans
• Fixed interest rates: Fixed rate mortgages are available for up to 10 years, meaning you know exactly how much you’re spending per month on your premises or investment property for 10 years
• Capital repayment holidays: Some lenders will allow you to take a temporary break in capital repayments (subject to approval, conditions apply, and interest still has to be paid)
• Flexible borrowing: With more commercial mortgage lenders available through the rise of challenger banks and non-bank lenders, this type of lending has become much more flexible. Interest only and higher leverage as standard are two examples of the evolution in this space
• Lower interest rates: Commercial mortgages tend to be more competitive than other secured business loans – this is because the lender uses property as security
• No early repayment charges: Some commercial mortgage products don’t carry early repayment charges
• Borrow with adverse credit: Assessed on a case-by-case basis, but as it is the income that the property earns, rather than you personally, personal credit is less important

Interest Rates and Fees

Like all specialist property finance, there are few ready-made options, so rates will be different for every project and with every lender. Similar to how Buy to Let mortgages are evaluated, lenders will also run a rental stress test to determine affordability and their lending criteria.

Some key metrics lenders will consider include:

• The value of the loan and the loan-to-value ratio (LTV) (typically, better rates are available with lower LTVs)
• The loan term (whilst most commercial mortgages are offered on a 5 or 10-year term, if the loan is amortising (Capital & Interest) the mortgage payments are typically calculated on a longer loan profile of 15-30 years to make payments more affordable
• The property itself: location, property type, condition, etc.
• For owner-occupied mortgages: business type, financials and balance sheet strength
• For investment mortgages: the rental income, length of the lease and quality of the tenant 
  

The interest rate a lender can offer also depends on how they are funded and the underlying cost of capital.

Types of Interest rates

• Fixed rates: The interest rates remain the same/ fixed for a set period of time, such as two, three or five years. This gives certainty over repayment costs, but fixed rates tend to be higher than variable rates
• Variable rates: The lender’s margin will be fixed, but the interest rate will change in line with the lender’s underlying cost of funds, so repayments can increase or decrease during the mortgage term. For lenders who track the BoE base rate, their rates will fluctuate according to whatever the Monetary Policy Committee (MPC) sets the base rate to.

Lenders not pegged to the BoE base rate might be pegged to another index such as SONIA, or it could be pegged to the lender's own internal cost of capital, which provides borrowers with very little certainty

Both have advantages and disadvantages – fixed rates offer repayment certainty but have higher rates, whilst variable rates carry the risk of payments going up but equally offer the potential to save money if rates come down.

Commercial mortgage fees

• Lender arrangement fee: Typically between 0.5% and 2.5% of the loan amount – some lenders will let you add this fee to the loan, and it’s worth checking this because it can be a hefty sum to be paid out of your pocket upfront
• Valuation fees: An independent lender-appointed valuer will carry out a property valuation, costing anywhere from a few thousand to tens of thousands plus, depending on the property type and value. The fees are usually paid once a loan offer has been issued
• Legal fees: Commercial mortgages are more complex to arrange than residential so the legal fees can be higher. You will also be responsible for the lender’s legal representation.  Any lender should give you a choice of at least 2 or 3 legal firms to represent them, so at least you get some control over costs
• Early repayment charges: Most lenders will charge fees to exit the loan before the full term ends. Especially if the loan is a fixed-rate
• Monitoring fees: Not all lenders charge this, but some will conduct an annual review of your loan, which they might charge for. Some lenders will also reserve the right to have their security (your property) revalued after a certain time period (always at the borrower’s expense)
• Higher fees for leverage and/or interest only: where loans are more highly geared (65%+), and/or the loan is on an interest only basis, lenders might increase their lending margin, meaning a higher interest rate

How Much Can I Borrow on a Commercial Mortgage?

How much you can borrow depends on some key metrics:

• The property’s value
• For owner-occupier properties, the creditworthiness of your business
• Predicted income/rental yield from commercial investment properties
• The lender you use
• Your financial circumstances

To help you understand how lenders calculate what you can borrow:

A lender’s maximum LTV and maximum affordability are two separate calculations, and they cannot exceed each other. So, if, for example, you can borrow a large amount based on the rental calculation but this exceeds the lender’s max LTV, then only the max LTV will apply. 

On the other hand, if the rental income provides maximum affordability far below the maximum LTV, then the affordability calculation will determine the maximum loan.

How to Secure a Commercial Mortgage with Brickflow

Brickflow is the fastest, most efficient way to secure the best commercial mortgage on the market. Here’s how it works: 

1. ENTER your project criteria and model deals
2. COMPARE loans from 100+ specialist lenders 
3. APPLY for a loan with your intermediary

Comparing commercial mortgages can be tricky. If your project isn’t a straightforward HMO (House in Multiple Occupation) or Multi-unit-freehold building for example, you will likely need a bespoke deal, which means making the same repetitive inquiry with multiple lenders to find a deal.

Unless you’re using Brickflow.

With Brickflow, you can enter the details of your property in less than 2 minutes and receive live loan results with accurate and up-to-date borrowing costs. 

Unlike other commercial mortgage calculators that give you a vague idea of monthly repayments, Brickflow gives you details on the following:

• Interest rates
• Deposit requirements
• Maximum LTV ratios
• True monthly costs
• Eligibility criteria

So you can instantly compare and analyse actual borrowing options in detail. Furthermore, one online Decision in Principle application is accepted by all lenders, meaning no more paperwork, and if one lender declines to lend, you can switch to a new lender with just one click.

The key stages to securing a commercial mortgage

• Preparation: Loan applications inevitably require paperwork, so start gathering the necessary documents at the outset, including things, from ID, business bank statements, lease agreements, financial credentials, property information, etc. For owner occupied applications you will likely need at least 2 years of trading accounts and up to 6 months of business bank statements.

With Brickflow, you can store all of this information online, so it’s ready when you are.

• Application: Your application is your chance to demonstrate to lenders that your property investment is worthwhile and you’re capable of meeting the mortgage repayments. Provide detailed rental yield projections / pre-agreed lease terms or your business plans. 

Brickflow’s Smart Appraisal™ covers everything lenders need to know to make a quick, confident credit decision, which is why they can return a Decision In Principle (DIP) within an hour (our record is 8 minutes!). What’s more, you can submit the same online application to multiple lenders, saving you hundreds of hours.

• Completion: The completion process can take time and involves multiple third parties from valuers to solicitors. Working with a team who specialise in commercial mortgages will make the process faster and smoother.

If you don’t have a broker but want to secure your commercial loan through Brickflow, we can refer you to our preferred broker partners who will use their expertise in commercial mortgages to leverage the best terms for your situation.

Alternatives to a Commercial Mortgage

Depending on what you plan to use a commercial mortgage for, there may be other more suitable finance options for you.

• Bridging loans: If you need a quick cash injection. Bridging loans are not a long-term finance option (1-24 months), and you will have to demonstrate exactly how you will repay the loan at the end of the term, but they can be a speedy solution
• Development finance: if you’re looking to refurbish or build a commercial property
• Business loan: A regular business loan from a bank or specialist lender might offer the right funding for your needs
• Leasing: Renting a commercial space will save the amount of upfront capital you will need to pay and can offer flexibility to move premises more often
• Residential mortgages: If you plan to run your business from your home, some mortgage providers will accommodate this and will likely have lower interest charges than a commercial mortgage