A guide to commercial mortages
If you’re looking to grow your business and renting a commercial property has become too expensive, you may be considering buying business premises of your own. As such, you might be looking into commercial mortgages. So, in this guide, we’re taking a look at the finer details of commercial mortgage loans to help you decide if this is the right type of business finance for you.
A commercial mortgage (also known as a commercial mortgage loan or business mortgage) is a loan to a business owner, enabling them to buy property or land for their business. This could be to develop or extend an existing property, build new property, or lease property to other businesses. Commercial mortgages are typically secured on a property or properties that are not the borrower’s residential property.
Similar to a residential mortgage, repayments of a commercial mortgage are typically done in monthly instalments with added interest. With a commercial mortgage, you won’t face any sudden or unexpected rent increases, but monthly repayments could increase if you have a variable rate, so it’s worth looking into whether you’re eligible for a fixed rate.
Commercial mortgages usually have a higher rate of interest than residential mortgages as they’re seen as higher risk. So, just like a residential mortgage, the larger the deposit you’re able to put down, the more attractive your interest rate will be. If the lender agrees, you may even be able to rent out part of the premises to another company to help cover the monthly repayments.
Commercial mortgages are typically offered with a term length of between three and 25 years, although some lenders will go as high as 30 years.
This is where a lender provides a business with capital to purchase land or property for that business to occupy or trade from.
This is where a lender provides a business with capital to purchase land or property for that business to rent out.
A business will be more likely to secure a commercial mortgage if they have at least a 25% deposit, but it’s also common for lenders to request up to 45% of the property’s value. If a business has some degree of property investment experience, either through owning or operating mixed-use or commercial properties in the past, this will also make it a more attractive borrower to lenders.
Obtaining a commercial mortgage involves a similar process as applying for a residential mortgage for your home:
There are a number of costs to be aware of when obtaining a commercial mortgage:
Given the costs involved in underwriting and doing the credit analysis for a commercial mortgage, many lenders may charge an admin fee for setting up the loan.
When it comes to securing a commercial mortgage, there are usually several professionals involved in the project, such as: solicitors, conveyancers, insurers, etc. These costs will depend on the scale of the project and can be included in the commercial mortgage.
Interest will be charged monthly and can be fixed or variable depending on what kind of mortgage you get.
If a broker was used as part of the transaction, this will likely incur a fee.
In order to calculate the value of a property, a lender will usually require an independent third party to undertake a valuation.
If you pay off your mortgage early or overpay one year, this may incur a penalty charge as the lender is losing out on interest that had initially been agreed with you. The details of any fees for early repayment or overpayment will be outlined in the terms and conditions of your commercial mortgage.
This will vary from lender to lender and is typically charged as a percentage of the total loan sum repayable at the end of the loan term.
Commercial property mortgages typically have lower interest rates than other unsecured borrowing. The interest on a commercial mortgage is also tax-deductible.
If you are able to get a fixed rate mortgage, you will be able to accurately calculate how much you need to repay each month which will help with cash flow and business planning.
As with a residential mortgage, the value of a property can increase over time, especially if it’s in an up-and-coming area. This can be a good way of realising capital growth over the long term.
If you have any additional space in the commercial property, your lender may agree to let you lease out this space to support the mortgage repayments or generate additional income.
As the terms of commercial property mortgages are typically over decades, the business is able to focus on other important matters such as sales and employee training.
It is very possible that your monthly commercial mortgage repayments will be similar to what you’re paying in rent, but just like a residential mortgage, every repayment brings you a step closer to owning the property. This equity can be very valuable and increase in value if the value of the property goes up.
Whatever your next property or real estate project is, OakNorth can help you get there. With business loans starting from £250,000 up to tens of millions, we’re financing ambitious entrepreneurs to help them scale at pace.
As with a residential mortgage, a deposit will be required to secure the loan and most lenders will look for at least a 20% deposit on a commercial mortgage. It can be challenging for a business to save up this kind of money – especially as that’s money that could be going into other parts of the business.
All maintenance, security and the general upkeep of the property would need to be paid for and undertaken by you.
There is a risk that the value of your property decreases which could have long-term implications for your finances.
If you are unable to secure a fixed rate mortgage, your business will be subject to variable interest rates which will fluctuate based on the Bank of England base rate. This can make financial planning and cashflow forecasting harder to manage.
Commercial mortgages are just one variation of property finance available to SMEs. At OakNorth, we provide flexible business loans designed with the industry in mind. From bridging loans to stretched facility solutions and umbrella facilities for repeat developments, whatever your next project is, we could help you get there.
Applying for a property finance loan with OakNorth Bank is easy: all you need to do is fill out this simple online form and a member of our property finance team will get back to you.
At OakNorth, we provide quick ‘yes’ or ‘no’ decisions and deliver funds in weeks rather than months. We’ve provided property finance to build new offices, student residences, turn vacant buildings into new commercial sites, and much more. We’ll work with you to create bespoke debt finance ranging from £250,000 to tens of millions, so you can get moving quickly.