If you’re new to the world of commercial mortgages you might be surprised by just how much they differ from their residential cousins.
Property ownership isn’t only something that’s available to residential buyers. Although renting your store, warehouse or business unit is perhaps the more common way to do things, owning your business premises could give you a much greater degree of trading certainty (i.e. no fluctuating rents) and a valuable capital asset once everything’s paid off.
Like the home you own, the way to buy a commercial space if you don’t have the full purchase amount sitting in your bank account is with a mortgage. If this is your first venture into commercial mortgages, however, you’re about to find they’re a very different animal to their residential counterparts. Here’s why.
1. You can borrow more
Commercial mortgages are typically available for amounts above £25,000. Some banks place the upper limit at £1 million. Several don’t have any upper limit. The lending criteria are more demanding than for residential mortgages (as we explore below) but if you can meet those criteria, you can access significant sums of money.
2. More types of commercial mortgage
You run a bakery. Or a garage. Or an office. The premises you buy will be the premises you operate from, and there are commercial mortgages available for these owner/occupiers.
Alternatively, your business might be built on property investment. You might be buying to develop a site. You might be planning to open franchise. There are specific types of commercial investment mortgage available for these purposes too.
3. Deposits are usually higher
You’ll get a better rate on a residential mortgage if you can put down a big deposit, but there are plenty of mortgage products available to you if you can only stretch to 5%. That’s not the case with commercial mortgages. Here, loan to value (LTV) ratios are more demanding.
If you’re going to be occupying your premises, you’ll probably (although not always) need at least a 20% deposit. If you’re buying as an investment, that will be higher still – probably 25% as a minimum.
Deposits often vary depending on sector and the form of business. So, for example, a professional practice might get a mortgage offer with a maximum LTV of 90%. For retail, that might drop to 70%, because opening a shop right now is seen by lenders as a riskier proposition than, for example, running an accountancy service.
You’ll find LTV and deposit requirements also vary depending on whether you’re buying a property from which to operate immediately, developing the site, or opening a franchise.
4. Commercial mortgages are more bespoke
The needs and circumstances of businesses are far more varied than your typical pool of prospective homeowners. There may be hundreds of residential mortgage products available, but for commercial purposes a traditional ‘product’ doesn’t really work. Things are much more bespoke, with mortgages offered on a case-by-case basis.
5. There’s a broader range of interest rates…
You may have heard that the interest rates on commercial mortgages are higher than for residential mortgages. This very much depends on the industry in which you operate, the nature of the mortgage (i.e. investment, development, franchise etc) and the degree to which you meet the lending criteria (see below).
Commercial mortgage rates are often higher than for residential, but not always. With such a large range of mortgages in play, it’s even more important to operate through a broker who can help thin out the field and help you zero in on the products that will really work for you.
6.…But you can offset interest against tax
Happily, you can offset the interest on your commercial mortgage against tax – something you can’t usually do as a homeowner. For our clients, that often helps to make things much more affordable.
7. Lending criteria are different
Just as with residential mortgages, affordability is the big issue for lenders eager to ensure that they’ll get their money back. Unlike residential, however, the way lenders determine who to lend to, how much and at what rate is very different.
Effectively, it all comes down to four pieces of information:
- The profitability of the business
- The security available
- The experience of the business within the sector; and
- Your deposit
You can find much more about these criteria in our Commercial Mortgage Guide.
Make buying commercial property easier
With our Mortgage Plus service, you don’t just get all our expertise applied to securing your next commercial mortgage. We also negotiate the purchase price and deal with estate agents, lenders and solicitors on your behalf.
It’s the simplest, most stress-free way to buy – and the simplest, most stress-free way to find the right mortgage for you. If you’re new to buying commercial property, you might just find it essential.
