Many UK business owners misunderstand how commercial mortgages work. These loans help businesses buy or invest in properties for commercial use. This blog will clarify common mistakes and provide practical advice to save time, money, and stress.
What is the true purpose of a commercial mortgage?
Commercial mortgages help businesses buy or refinance properties. It can fund office spaces, warehouses, shops, or land purchases. Some companies use it to avoid rising rents and unpredictable lease costs.
It also supports property investments, upgrades, or developments. Borrowers may even invest in energy-efficient buildings with specialised loans like green commercial mortgages. For added flexibility, repayment holidays or interest-only periods are sometimes available.
How is a commercial mortgage different from a buy-to-let mortgage?
Commercial mortgages are for non-residential properties like offices, warehouses, or hotels. Buy-to-let mortgages focus on residential properties rented out to tenants. Lenders offer specialist products for mixed-use spaces, such as a flat above a shop.
Borrowers applying for commercial loans often need business plans and proof of stable income from the property. In contrast, buy-to-let applicants rely more on projected rental income.
Companies can secure up to three buy-to-let properties with limited company mortgages but face an LTV cap of 70% on repayments or 65% for interest-only terms. Both options involve credit checks and may include early exit penalties if switching types mid-term.
How much deposit do I really need for a commercial mortgage?
Most lenders require at least a 30% deposit of the commercial property value. For high-risk businesses, like restaurants or bars, this may go higher. A property worth £100,000 would typically need a deposit of £30,000 or more.
Loan-to-Value (LTV) ratios often cap at 70%, meaning you must cover the rest with your own funds or equity. Some lenders might accept less if you offer extra security. Properties below £50,000 usually don’t qualify for commercial mortgages.
Move ahead to understand how LTV ratios impact borrowing power.
Understanding Loan-to-Value (LTV) ratios
Loan-to-Value (LTV) ratios play a major role in how much you can borrow against a property. They also impact the risk lenders associate with your mortgage deal.
What are LTV ratios in commercial mortgages?
LTV ratios show how much of a property’s value a bank will lend. For commercial mortgages in the UK, lenders usually offer up to 70–75% LTV. This means businesses must cover the remaining 25–30% with their own deposit or equity.
The ratio is calculated by dividing the loan amount by the property’s value, then multiplying it by 100 for a percentage. If a property costs £200,000 and you borrow £140,000, your LTV is 70%.
Properties under £50,000 are often not eligible. Some lenders may accept higher LTVs if you provide extra security like collateral, but this isn’t common practice.
How do LTV ratios affect my borrowing power?
A higher Loan-to-Value (LTV) ratio limits how much you can borrow. It caps the loan at a percentage of the property’s value, such as 70% or 65%. For example, with an LTV of 70%, a £1 million property would allow borrowing up to £700,000.
The remaining £300,000 must come from your deposit or other funding sources. Businesses seen as risky often face stricter caps and need bigger deposits. Green commercial properties may also have varied LTV rules due to their energy efficiency.
Lenders view high LTVs as riskier, leading to higher interest rates for borrowers. Strong credit histories help secure better terms and access higher LTV loans. Buy-to-let commercial mortgages are stricter; repayment options generally cap at 70%, while interest-only loans top out at around 65%.
Lowering your LTV with a larger deposit can improve lending terms significantly, opening doors to more favourable rates and conditions that save money in the long run.
What additional costs and fees should I expect?
Costs for a commercial mortgage can add up quickly. It’s important to understand all the fees before making decisions.
- Arrangement Fees: Lenders usually charge this as a percentage of the loan or a fixed sum. It starts from £25,000 on smaller loans.
- Valuation Fees: A valuer inspects the property to check its worth. This fee depends on the property size and type.
- Legal Fees: Both you and the lender will have legal costs during the process. These include contracts, title checks, and other paperwork.
- Survey Fees: A detailed survey may be needed to assess property conditions. This ensures there are no hidden issues.
- Insurance Costs: Buildings insurance is often required by lenders to protect their investment.
- Early Repayment Charges: Fixed-rate mortgages often come with penalties for paying off early or partly repaying your loan.
- Account Management Fees: Lenders might charge extra ongoing fees for managing your account, listed in their Tariff of Charges.
- Breakage Costs: Fixed-rate loans can incur breakage charges if closed before term due to interest rate changes.
- Redemption Administration Fees: Some lenders charge this when clearing your loan at the end of its term.
- Broker Fees: If using mortgage brokers like Revolution Finance Brokers, expect separate broker fees for their services.
Each fee affects your total cost, so plan carefully to avoid surprises later!
How can I compare interest rates and mortgage terms effectively?
To compare interest rates and mortgage terms effectively, it’s vital to break down key elements. Every lender has different conditions, and small details can make a huge financial difference over time. Here’s a simple table to help make sense of it all:
| Key Factor | What to Watch For | Why It Matters |
| Fixed vs Variable Rates | Check if the rate is stable (fixed) or relies on market movements (variable). | Fixed rates offer predictability, while variable rates can rise or fall based on market conditions. The choice impacts budgeting certainty. |
| Length of Fixed Term | Determine how long the interest rate stays fixed. Options often range from 2 to 10 years. | Longer fixed terms provide stability over time, reducing exposure to market rate jumps. |
| Loan-to-Value (LTV) Ratio | Higher LTV ratios may result in higher interest rates due to increased risk to lenders. | Lower LTV ratios can secure more favourable terms, reducing long-term costs significantly. |
| Repayment Structure | Clarify if repayments include interest-only phases or combined capital and interest payments. | Interest-only options can lower short-term costs but may result in large final repayments. |
| Additional Fees | Look out for arrangement, legal, and valuation fees, which vary across lenders. | Upfront costs can add thousands to borrowing, so factor them into comparisons. |
| Green Incentives | Some lenders offer discounts for properties with high EPC ratings (B or better). | Energy-efficient properties can secure lower rates, saving money while being eco-friendly. |
| Flexibility Options | Check if lenders offer capital repayment holidays or switching between rate types. | Flexibility can provide breathing space for businesses during tough financial periods. |
What are the eligibility criteria and required documents?
Obtaining a commercial mortgage in the UK involves meeting specific requirements. Many lenders also request a variety of documents during the application process.
- Applicants need to provide three years of audited or certified accounts to demonstrate financial stability. These accounts offer lenders insight into the business’s performance over time.
- Lenders generally require two months’ bank statements. This allows them to verify cash flow and spending patterns.
- A detailed statement of assets and liabilities is necessary. It outlines what you own, what you owe, and your financial standing overall.
- Information on all directors and partners must be submitted. Lenders use this for due diligence checks to assess potential risks.
- Tax returns from the past three years are usually a requirement. These serve to confirm income details and tax compliance history.
- Current and forecasted business performance figures are crucial. Lenders evaluate these to assess the likelihood of successful repayment.
- Most lenders favour applicants with prior experience in managing or owning a commercial property, as this can significantly enhance the chances of approval.
- The nature of the business is also a factor, with certain industries considered higher risk by mortgage providers.
- A good credit score demonstrates strong debt management, easing lender concerns about potential defaults.
- While eligibility covers a wide range of legal businesses, those deemed poor investment risks may face challenges in securing funds easily from banks or other lenders active in UK commercial mortgage markets.
Conclusion
Commercial mortgages can feel like a puzzle, but they’re key for growing businesses. Knowing the differences in terms, deposits, and costs makes all the difference. By planning ahead and checking details carefully, business owners can avoid common pitfalls.
A bit of extra effort today could save money and stress tomorrow. Always weigh your options wisely before signing on the dotted line!
FAQs
1. What is a commercial mortgage, and how does it differ from residential mortgages?
A commercial mortgage is a loan used to buy or refinance properties for business purposes, like offices or shops. Unlike residential mortgages, they focus on investment properties and often have different terms, such as higher interest rates.
2. How does the loan-to-value ratio affect my commercial mortgage options?
The loan-to-value (LTV) ratio measures the size of your loan compared to the property value. A lower LTV can mean better rates from commercial mortgage lenders, while a higher LTV might require more security or stricter underwriting.
3. Can I get an interest-only mortgage for my business property?
Yes, many lenders offer interest-only mortgages for businesses. These loans let you pay just the interest each month but require full repayment of the principal at the end of the term.
4. Are bridging loans useful when buying investment properties?
Bridging loans provide short-term funding if you need quick cash before securing long-term finance like a standard commercial mortgage. They’re handy but often come with higher costs.
5. Will my credit history impact refinancing options for my current account-linked business loan?
Yes, your credit history plays a big role in refinancing decisions by lenders. Poor credit could limit options or result in less favourable terms like higher fixed-interest rates.
6. Why should UK businesses consider energy-efficient buildings when applying for financing?
Energy-efficient buildings with good Energy Performance Certificates (EPCs) can save money on bills and attract sustainable business incentives from some banks or building societies like Norwich & Peterborough Building Society!
