A commercial mortgage is any loan secured on property which is not your residence. Buy to let mortgages are a special type of high-volume commercial mortgage which is packaged for a volume market.
When are commercial mortgages used?
Commercial mortgages generally take over where business loans finish. Business loans up to £25,000 are unsecured, but for larger amounts lenders need security to reduce the risk to themselves.
A business mortgage usually lasts from three to 25 years, and you can usually find a 70-75% mortgage. This is a measure of loan-to-value ratio to see how much you’re borrowing in relation to how much the property is worth. If it’s an investment then the amount you can borrow will be determined by the rental income generated by the investment, but this will not exceed 65% of the purchase price. If you are buying a business which includes goodwill, stock etc then the amount available will be further reduced.
The benefits of taking out a commercial mortgage
Here are a few reasons why you might want to think about taking out a commercial mortgage:
- The interest on your commercial mortgage is tax-deductible
- If your property increases in value, your capital could also see an increase
- You’ll be able to rent out the property to generate extra income
How to apply for a commercial mortgage
Hiring a specialist broker could help ensure you’re paired with the most suitable lender and make the application process more manageable. A commercial mortgage application works similarly to taking out a regular mortgage for your home:
- You complete and submit the Asset and Liability form (this can usually be done online)
- You’ll then be asked to complete the commercial mortgage application form
- You’ll be required to provide information on your business (listed below)
- The property is valued
- All legal due diligence will be carried out by the lender’s solicitors
- If approved, you’ll receive a mortgage offer by the bank
You may have to provide a business plan for financial projections – this could help the lender determine how likely you are to be able to pay off the loan.
Types of commercial mortgages
Mortgage loans can be divided into two categories:
Owner-occupier mortgages: This is used to buy property that will be used as trading premises for your business.
Commercial investment mortgages: This is used for property you’re planning to let out.
In order for you to qualify for a commercial mortgage, you’ll need to pass the lender’s eligibility checks which usually includes:
- The cash flow and any debts you may owe to assess the financial health of your company
- Your businesses’ projected income to determine whether you can cover the cost of the loan
- Your ability to pay the deposit which can range from 20% to 40% of the loan
- Rental income may also be taken into account as this will have an effect on your business’ cash flow
- General income, credit and assets
If you want more information about Commercial Mortgages, contact Sapphire Growth today.
