If you’re considering buying a premises for your business, then you may think you know a fair bit about mortgages. After all, how different can a commercial mortgage be to a standard domestic one? The answer is, quite a bit! Commercial mortgages are often far more involved, complex and bespoke than a residential one. There aren’t really any ‘off the shelf options’ you can choose from – they are all tailored to your individual situation- so you can’t apply online or compare rates that easily. But that doesn’t mean they are unattainable! It just means you need to know a little more about the process before you jump right in. We hope that this beginners guide to commercial mortgages will help answer some of your questions and arm you with the information you need.
What Is A Commercial Mortgage?
Commercial mortgages are generally considered the natural ‘next step’ from a business loan, and are used when a business owner wants to buy a property for commercial use. The concept of a commercial mortgage works in the same way as a residential one, except instead of being secured against your home, it’s secured against a property for your business that is not your residence. This could be a commercial unit in a shopping centre, an office block, a garage or even a residential property that you intend to rent out for residual income. But because each type of commercial mortgage is different, each loan needs to be assessed individually and priced according to risk.
Are There Different Kinds Of Commercial Mortgage?
Because buying a commercial property is different from buying a house, there are a few different options when it comes to mortgages. While they might all be packaged in differing ways, they essentially boil down to two types:
Owner-Occupied: This type of commercial mortgage is used for business owners who are looking to buy a property for trading premises. The owner will be using the space for their own activities, and won’t be sub-letting it.
Commercial Investment / Buy-To-Let: Commercial investment mortgages (also known as commercial buy-to-let) are aimed at people who want to invest in a commercial property, but do not intend to use it themselves. This could be purely as an investment, but more often it is so they can let it out to a third party and create residual income. This would fall under ‘buy to let’ and can incur higher fees as a result.
The type of mortgage you choose can have an impact on the kinds of finance and resulting rates you’re offered, and that can quickly turn into a minefield. At this stage, we recommend speaking to a Commercial Mortgage specialist from The Money Guardian who can help you understand the options and what each would mean for you.
How Long Do Commercial Mortgages Last?
As with residential mortgages, commercial mortgages can run for different lengths of time depending on the rate and deal you reach with your provider. However, generally a commercial mortgage is between 3 and 25 years, and if shorter-term finance is required, then a bridging loan is often more suitable.
Why Can’t I Find A Definite Rate For A Commercial Mortgage?
Because there aren’t any! Commercial mortgages are all assessed and offered based on your individual circumstances, your business and your future plans. A commercial lender will look at your applications carefully and asses the level of risk you present, and then give you a rate based on that. So every single commercial mortgage is different, and there is no way to guess which rate you will get.
How Do Lenders Asses If I Can Afford A Commercial Mortgage?
Unlike residential mortgages, commercial mortgages are assessed on a case-by-case basis by lenders. The way they asses the loan will depend on whether you’re applying for an owner-occupied mortgage or a buy-to-let.
For an owner-occupied commercial mortgage, the lender will look at your business accounts going back a few years to assess affordability, as well as potentially asking to see your projected business accounts for the next year. This is so that they can see if you will be able to consistently afford the market rental value.
If you’re applying for a buy-to-let mortgage to rent out the premises to businesses as tenants, the lender will ask to see lease agreements that are in place, and prefer a minimum of a 3-year term. IT’s not suitable to have existing ‘rolling leases’ or casual ‘good faith’ tenancy agreements, even if that’s how the property has been managed in the past. If you can’t provide accounts and lease agreements, then you may not be approved.
How Do I Find The Best Commercial Mortgage For Me?
Unfortunately, high street banks aren’t always the best place to start if you’re looking for a commercial mortgage. Because they can be quite complicated and need to take a lot of different things into consideration, you’re much better off using a specialist broker. A commercial mortgage broker can listen to your unique circumstances, give you advice if there is something you need to do before applying, and then guide you through the process. As we are Commercial Mortgage brokers, The Money Guardian will have access to hundreds of different, specialist lenders and will have key relationships in place to have those open and positive negotiations on your behalf. That means you’re much more likely to find a commercial mortgage that suits your needs, and that will accept you in a lot less time than if you tried to do it yourself.
At The Money Guardian, our Commercial Brokers love helping business owners onto the corporate property ladder with their first commercial mortgage. We offer a free consultation service, so that we can understand your situation, get to know more about your business and see if we can help you secure that commercial property to grow your business. If you’d like to know more about our commercial mortgage service, just get in touch with the team today and book your free consultation.