Commercial mortgage FAQs

If you’ve just started your business or have been operating for a while and need room to expand, store equipment or stock, you may want to purchase your own premises. A commercial mortgage can provide you with the funds to enable you to break free of restrictive lease agreements and move into the type of premises that would best suit your business.

A commercial mortgage can also provide you with the funds to:

• Purchase an existing business
• Purchase your existing business premises
• Invest in commercial or residential investment property
• Release equity trapped in existing commercial property
• Develop property on a commercial or residential basis

What are the benefits of a commercial mortgage?

Aside from providing your business with a major asset that is likely to appreciate in value, a commercial mortgage offers a wide range of additional benefits. Depending on the terms of your mortgage contract, the repayments may be similar to your current rental payments, which means you won’t have to budget for additional property expenditure or rental increases. In addition, the interest that you need to pay on the mortgage is tax-deductible and, if you have more room than you need, it may be possible to sub-let some of the space – with an agreement from your lender of course!

Further benefits of a commercial mortgage include:

• The opportunity to consolidate expensive short-term finance
• The ability to raise money for working capital or an injection of cash flow
• A reduction in the costs of an existing commercial mortgage
• An opportunity to increase your earning potential through refurbishing, improving or expanding your business property
• Avoidance of exposure to just one lending source for both business banking and property investment

Are there any disadvantages?

A commercial mortgage is a long-term commitment and, like a residential mortgage, will need to be paid off over a period of 15 years or more. However, if you don’t make the repayments on time you will accrue additional interest and, if you continue to default on payments, the property can be repossessed.

How do I apply for a commercial mortgage?

The application process for a commercial mortgage can be complex. While it is possible to negotiate a commercial mortgage yourself, a broker or independent intermediary - like The Diverse Finance Company - can help you negotiate your way through the maze of available options.

If you do plan to negotiate to mortgage terms yourself, your first port of call should be a local business bank manager. They can provide advice on the mortgage products they offer and reveal the details that they will require. Alternatively, you may want to search the Yellow Pages or use the Internet to track down a list of commercial mortgage lenders and source quotes.

However, an independent intermediary or finance broker can provide access to the entire commercial mortgage market and support you throughout the whole application process to ensure you get the best deal and repayment options without having to complete the negotiations yourself.

What do I need to prepare before I approach a mortgage lender?

In most cases you will need to have access to around 20-30% of the purchase price as a deposit. If this isn’t an option, however, you could consider a 100% commercial mortgage (see below for further details on this type of mortgage).

The lender will want firm assurances that you can meet the required mortgage repayments. A bank, for example, may require you to provide a full set of trading accounts for the last two years or, if your business is a start up, a full business plan showing income projections for the business.

Other lenders may be less stringent in their need for detailed accounts and business plans, and may lend based on the value of the property. However, in general, these mortgage options will tend to be slightly more expensive.

In addition, the lender may want to see the following:

• Details of the property and agreed purchase price
• A current valuation of the property or the business
• A profit-and-loss forecast for the next year
• Business bank statements
• The employment history or a profile of each partner or director
• Asset and liability statements for each partner or director

How much can I raise?

The amount that can be raised for a commercial mortgage is dependent on the total value of the property, the deposit you have available and the maximum loan-to-value ratio (LTV) that the lender is willing to provide.

On average, the LTV is 70% of the market valuation. However, some specialist commercial property lenders will lend up to 85%. It is also possible to achieve a 100% commercial mortgage with additional forms of security.

What repayment options are available?

There are two main repayment options for a commercial mortgage:

• A capital repayment mortgage means you repay a proportion of the capital along with the interest
• An interest-only mortgage involves simply paying the interest each month

A variety of other more complex routes for procuring a commercial mortgage are available, however it will be necessary to undertake independent financial advice on these.

What is a 100% commercial mortgage?

It can be difficult for small businesses to raise enough capital for a deposit on commercial property so some lenders provide the option of a 100% commercial mortgage. To qualify for this option you will need to provide additional security, usually in the form of other commercial or residential property.

See our guide to Raising a 100% Commercial Mortgage for further information.

What additional criteria will the lender set?

Any additional criteria imposed by the lender will depend on the type of business, the property you wish to purchase and the lenders policy. An independent intermediary can negotiate these terms on your behalf to ensure you achieve the best rates and terms.

Will there be any additional charges?

The costs involved in raising a commercial mortgage vary depending on the route you decide to take, including whether you choose to negotiate yourself or engage the services of an independent intermediary.

Some fees and costs that may need to be taken into account when setting up a commercial mortgage include:

• Valuation fees, which are charged for independently valuing the property
• Legal and professional fees, such as general insurance and the preparation of legal documents
• Lender arrangement or processing fees

How long will it take for the funds to become available?

Raising commercial finance can often be time consuming and, depending on how complicated your situation is, on average it can take anywhere from a few weeks to several months to complete the commercial mortgage process. However, complex cases can take much longer due to the number of variables involved.

What happens if I’ve got a poor credit history?

Even applicants with a less than perfect credit history can still qualify to raise finance to purchase a commercial property. Provided any adverse credit issues have been satisfied, and your current business is healthy and able to prove loan payment affordability, raising a commercial mortgage can still be a viable option

Where do I go from here?

First of all, decide whether you want to apply and negotiate directly with the lenders yourself or if you would prefer an independent intermediary or finance broker to represent you.

It will then be necessary to make sure your business can afford to meet the mortgage repayments.

If possible, prepare your current accounts or a comprehensive business plan. These will help you to qualify for the best rates and terms.

Finally, take legal or accounting advice regarding the ownership structure of the commercial property as there are tax implications associated with this.

The Diverse Finance Company, for example, can negotiate with a number of lenders to ensure you achieve the best rates and terms available. Starting out with the right advice and team on your side can mean the difference between successfully raising a commercial mortgage and being turned down.

So make sure you’ve done your homework and you’ll have the best chance of succeeding!

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Commercial mortgage FAQs