Commercial Mortgage Guide

A commercial mortgage is a large loan secured against a commercial property, the money is borrowed in a similar way to a residential mortgage but interest rate is only determined once a potential lender has assessed the performance and credit worthiness of your business. The raised finance can be used to buy, build or develop almost any type of commercial property or plot of land.

Types of Commercial Mortgage

The involvement of the applicant within the property will also influence the lending decision, the following are the most popular;

Owner-Occupied

Business owners looking to purchase the building their business currently occupies tend to be considered slightly less risk than those purchasing commercial property with view to letting it.

Investment / Buy-to-Let

Investment Mortgages or Commercial Buy-to-Let mortgages are used to finance an investment opportunity in the form of commercial property, similar to the residential buy-to-let market any lender will expect you to lease the property in order to cover a percentage of the repayments usually to the tune of 125%.

Semi-Commercial

Semi-commercial properties are popular for investors keen to take the first steps into the commercial buy-to-let market. The property compromises of a commercial space and residential dwelling making it neither a commercial or residential but both. The majority of semi-commercial mortgages are for retail units with a flat above.

Interest Rates

Commercial mortgages tend to carry slighter higher interest rates than there residential counter parts especially if the mortgage is offered with a high LTV. A variable rate represents the least risk to the lender so naturally is the most popular but the competitive nature of the market has led to lenders offering incentives in the form of fixed rate offers.

Variable Rate

The interest rate on a variable rate mortgage will mirror that of the Bank of England Base Rate (LIBOR may be used) and fluctuate in accordance. The rate the lender offers may accurately reflect the base rate plus the lenders premium commonly called a tracker or be more loosely tied to the base in the form of the lenders Standard Variable Rate (SVR). Initial rates are usually attractive and are less likely to incur arrangement fees as the name insinuates variable may rise as well as fall so be prepared.

Fixed Rate

Fixed rate mortgages fix the interest rate at a set figure for a period of time, usually two to five years but ten year deals are not uncommon. Following the fixed rate period the lender will revert to a variable rate. Stabilising the monthly repayments will allow for more accurate budgeting and added piece of mind but may come at a price, lenders will usually charge an arrangement fee and may enforce an ERC or early repayment charge in an attempt to delay remortgaging

Repayment Methods

There are several different methods of repaying a commercial mortgage including;

Capital Repayment

Capital repayment is the conventional means of paying off a mortgage, the loan amount is divided between the repayment term and the incurred interest added. A consideration should be the calculation used to work out the interest You will repay the mortgage divisible but the term in months plus the interest incurred,

Interest-Only

An interest-only commercial mortgage will only require you to repay the interest accrued whilst the capital is paid back via an agreed arrangement. Interest-only mortgages are popular within commercial finance, especially if the property encompasses the business, a bed & breakfast for example, where the likelihood of being able to rent the property is low and the business isn't guaranteed to turn a profit initially. In these cases lenders will usually agree to an interest-only payment scheme for a limited time stipulating that additional collateral be secured against the loan or the business has sufficient means of repaying the capital through the sale of assets or relinquishing of investments. Alternatively longer term interest-only mortgages may be offered if an accompanying insurance policy or pension plan can be provided to guarantee the outstanding capital can be repaid at an agreed date in the future.

Final Payment

This option effectively reduces the monthly repayments by reducing the loan amount using a guaranteed lump sum payment. A specialist lump sum assurance will be required usually in the form of a pension plan or insurance policy.