As a small business owner, owning your own premises can be a significant step toward growth, stability, and long-term success. Whether you’re looking to purchase an office, a retail unit, a warehouse, or even a mixed-use property, a commercial mortgage can make it possible. But navigating the world of commercial mortgages can be daunting if you’ve never applied for one before. This guide will cover all you need to know, including:
- What commercial mortgages are
- The types of commercial mortgages available
- The rates and terms for commercial mortgages
- The criteria lenders use when deciding whether to provide a commercial mortgage
- How to secure the right financing for your small business
What is a commercial mortgage?
A commercial mortgage is a loan secured against a property that you don’t live in, either for business use or as an investment property. Essentially, it allows you to borrow funds to purchase or refinance commercial property.
Commercial mortgages apply to a wide range of properties, including:
- Offices and office buildings
- Shops, retail units, and shopping centres
- Industrial units, factories, and warehouses
- Hotels, spas, pubs, and other leisure properties
- Mixed-use developments with both commercial and residential elements
In addition, commercial mortgages can also be used to purchase land for commercial purposes, whether for constructing offices, residential units, or other types of commercial property. Lenders may treat land or development finance slightly differently, so it’s important to clarify the purpose of your loan before applying.
Types of commercial mortgages
There are two main types of commercial mortgages, which are as follows:
1. Owner-occupied mortgages
An owner-occupied mortgage is for a business that wants to buy property to operate from. For example, this mortgage would be relevant to your small business if you were purchasing an office or warehouse to run your business from.
2. Commercial investment mortgages
A commercial investment mortgage is used to purchase properties that will be rented out. The lender assesses the potential rental income to determine your ability to repay the loan. For example, if you’re an investor buying a shop to lease to tenants, you would use an investment mortgage.
Commercial mortgage rates and terms
Commercial mortgages differ from residential mortgages in several ways:
- Interest rates: Commercial mortgage rates can be fixed or variable, and they are typically higher than residential mortgage rates. However, because the loan is secured against property, rates are often lower than unsecured business loans.
- Loan terms: Terms generally range from 5 to 25 years, depending on the lender and type of property.
- Repayment types: You may choose capital repayment (repaying both interest and principal over time) or interest-only (paying only the interest, with the principal due at the end of the term).
Criteria for a commercial mortgage
Lenders take into account various factors before granting a commercial mortgage. The key criteria include:
- Loan-to-value (LTV): Typically, lenders offer up to 70–75% of the property’s value. A larger deposit improves your chances of approval.
- Business financials: Lenders assess your company’s financial health, including revenue, profits, cash flow, and projected growth.
- Credit history: Both personal and business credit scores are reviewed to determine reliability.
- Property type and location: Certain property types or locations may be seen as higher risk, affecting lending decisions.
- Rental income potential: For investment properties, projected rental income is crucial in evaluating affordability.
- Legal standing: Lenders require assurance that your business complies with all regulations and is in good legal standing.
The structure you choose will depend on your cash flow, investment goals, and whether you plan to hold or sell the property.
How to apply for a commercial mortgage
Before starting your mortgage search, take the following steps:
- Assess your needs: Determine how much funding you require and identify which type of mortgage suits your transaction. Consider your long-term business plans and whether the property will be owner-occupied or rented.
- Prepare financial documents: Lenders will typically request up-to-date accounts, financial forecasts, and bank statements. Having these ready increases the speed and likelihood of approval.
- Find the right lender: Researching lenders can be time-consuming. A commercial finance broker can help by assessing the market, identifying suitable lenders, and guiding you through paperwork and legal requirements.
Benefits of using a commercial finance broker
Working with a specialist broker can significantly improve your chances of securing a commercial mortgage. The benefits of engaging a broker include the following:
- Access to a wider market: Brokers have relationships with multiple lenders, including those who specialise in small business lending.
- Professional presentation: Brokers help structure and present your application professionally, increasing approval chances.
- Negotiation: Brokers can often negotiate better rates, terms, and fees on your behalf.
- Guidance and support: Brokers can clarify eligibility requirements, document preparation, and loan structuring to match your business objectives.
Conclusion
Obtaining a commercial mortgage can be complex, but with careful planning and the right support, it’s achievable for business owners. For the best chance of success, assess your business needs, prepare your finances, and consider working with an expert broker.
At ASC, we specialise in helping business owners secure the right commercial mortgage for their goals. Whether you’re buying an office, warehouse, retail property, or an investment property, our team can guide you through every step. From identifying the right lender to presenting your application professionally, we’ll take care of the whole process. With ASC on your side, you can focus on growing your business while we handle the finance.
