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.  

What is a commercial mortgage?

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.  

How does a commercial mortgage work?

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.

The difference between commercial and buy-to-let mortgages

Commercial property mortgage

This is where a lender provides a business with capital to purchase land or property for that business to occupy or trade from.

Commercial buy-to-let mortgage

This is where a lender provides a business with capital to purchase land or property for that business to rent out.

 

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Who is eligible for a commercial mortgage?

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.

How to get a commercial mortgage

Obtaining a commercial mortgage involves a similar process as applying for a residential mortgage for your home:

  • You will need to complete and submit an asset and liability form, as well as the commercial mortgage application form
  • You’ll need to provide information on your business so the bank can assess whether your business is eligible. This will include: bank statements (typically for the last three months), annual accounts (typically for the last three years), proof of identity and address for all the business directors, lease and/or tenancy agreements, and a business plan including how the property will be used
  • Once the above has been completed, the property will undergo a valuation and due diligence will be carried out by the lender’s solicitors
  • If approved, you’ll receive a mortgage offer from the bank
  • Contracts will then be exchanged and need to be signed and any deeds transferred over

What are the costs involved in taking out a mortgage for commercial property?

There are a number of costs to be aware of when obtaining a commercial mortgage: 

Lender arrangement fee

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.

Professional fees

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

Interest will be charged monthly and can be fixed or variable depending on what kind of mortgage you get.

Broker fees

If a broker was used as part of the transaction, this will likely incur a fee.

Valuation fees

In order to calculate the value of a property, a lender will usually require an independent third party to undertake a valuation.

Early repayment or overpayment fees

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.

Exit fees

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.

 

Advantages of a commercial mortgage

Lower interest rates

Commercial property mortgages typically have lower interest rates than other unsecured borrowing. The interest on a commercial mortgage is also tax-deductible.

Manage your cash flow

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.

Capital gains

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.

Rental potential

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.

Financial planning

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.

Building equity

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.

 

 

 

 

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Disadvantages of a commercial mortgage

Saving a deposit

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.

Property maintenance

All maintenance, security and the general upkeep of the property would need to be paid for and undertaken by you.

Falling property prices

There is a risk that the value of your property decreases which could have long-term implications for your finances.

Interest rate

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.

 

 

 

Applying for property finance with OakNorth

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.

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