What are Commercial Mortgages and How Do They Work?
A commercial mortgage is a long-term loan secured against a non-residential property used for business, such as an office, shop, restaurant, factory, warehouse, or other commercial building.
You make monthly repayments on a commercial mortgage over a set term, usually between 10 and 30 years, interest rates can be fixed or variable, and the loan amount is based on the property's value and your broader finances.
Commercial mortgages function similarly to residential mortgages, but have some key differences:
- Higher minimum deposits, often 25-30%
- Shorter maximum terms (usually 30 years)
- Stricter eligibility criteria based on your business's creditworthiness
The mortgage experts at Clifton Private Finance can advise if a commercial mortgage is the right choice based on your business circumstances and goals.
Types of Commercial Mortgages
Commercial mortgage lenders offer various types of mortgage products. Some of the more common options include:
- Owner-Occupied Mortgages - For purchasing/refinancing your own business premises. Typically up to 75% LTV.
- Buy-to-Let Mortgages - For financing properties to rent out commercially. Typically up to 70% LTV.
- HMO Mortgages - For houses in multiple occupations (HMOs).Typically 60% LTV.
- Short-Term Loans - Bridging finance repaid within 1-3 years. Typically up to 70% LTV.
- Development Loans - For financing construction/renovations. Typically up to 65% LTV.
- Portfolio Mortgages - For landlords with multiple properties. Typically up to 70% LTV.
With access to hundreds of lenders, we can aid you in finding the most suitable mortgage product for your specific commercial property goals.
The LTV ratio, fees, interest rates, and eligibility criteria will vary between mortgage types.
Commercial Mortgage Lenders in the UK
Many banks and private finance companies offer commercial mortgages in the UK. Here are a few examples of known banks and lenders:
- High Street Banks - Barclays, HSBC, NatWest, Lloyds
- Challenger Banks - Aldermore, Metro Bank, Close Brothers
- Private Lenders - Paragon, Precise Mortgages, Shawbrook Bank
- Overseas Banks - Investec, Bank of Ireland, Bank of Cyprus
As an independent broker, we can access commercial mortgages from all types of lenders, most unavailable to approach directly. Moreover, we can find you the best rate too.
Bigger lenders often have cheaper rates but stricter criteria. Smaller private lenders are more flexible yet charge higher rates. Using a broker such as us gives you access to both kinds of lenders.
Commercial Mortgage Rates and Fees
Expect to pay an arrangement fee of 1-2% of the loan value when taking out a commercial mortgage. Valuation and legal fees also apply.
Interest rates vary hugely between lenders, from 3% up to 8-10% with private lenders. Rates depend on:
- Your credit score and financial history
- Loan-to-value ratio
- Type of commercial property
- Whether the rate is fixed or variable
Negotiating the best deals on your own can be challenging. Be sure to account for all costs and fees within your business plan. We can help liaise with various lenders, and get your application straight to the right sort of lender.
For a more detailed breakdown, read our full guide to commercial mortgage rates.
Commercial Mortgage Calculator
For a better initial understanding of what you'll pay for a commercial mortgage, use our Commercial Mortgage Calculator:
How Do You Pay Interest on a Commercial Mortgage?
With a commercial mortgage, you will make monthly interest payments plus payments towards the principal loan amount. There are two main ways interest can be paid, and each has its benefits and drawbacks:
With an interest-only mortgage, your monthly payments only cover the monthly interest owed. You do not pay anything towards the principal loan itself during the term.
At the end of the mortgage term, you will need to repay the original loan amount in full as a lump sum or refinance to a repayment mortgage. Interest-only works well when you expect property value to rise significantly.
With a repayment mortgage, your monthly payments cover both the interest for that period plus some capital repayment of the principal.
By the end of the term, the entire loan will be paid off through the combined interest and capital repayments. There is no lump sum due at the end.
Most lenders require a repayment mortgage. Interest-only is harder to qualify for due to the lump sum payment needed at the end.
How to Apply for a Commercial Mortgage
Applying directly through a lender involves considerable paperwork. Working with a specialist mortgage broker streamlines the process.
How does it work? And what does the process look like? - Here's a brief breakdown of what you might expect during the application process:
- Find a suitable property and make an offer conditional on financing.
- Approach a broker who will assess your situation and find appropriate lender options.
- The lender will evaluate your credit score, income, business accounts, existing assets/liabilities and the property itself.
- You'll need to provide a deposit of 25-30% and proof you can cover monthly repayments.
- The lender will carry out property valuations, anti-money laundering and fraud checks.
- If approved, you can finalise the purchase and mortgage account.
- Legal fees apply for conveyancing work. The broker can recommend solicitors.
From the initial inquiry, With Clifton Private Finance guiding you, the application process takes just 4-8 weeks from initial inquiry to mortgage offer. Depending on the complexity of the mortgage and what is required.
Benefits of a Commercial Mortgage
Some key advantages of financing your business premises include:
- Purchase larger commercial buildings - Funds to buy a property for your company rather than leasing
- Retain cash flow - Spread costs over years rather than the huge initial outlay
- Tax benefits - Interest repayments can be offset against corporation tax
- Improve credit - Regular repayments build your business credit file
- Remortgage - Release equity or refinance at better rates as property value rises
- Expand premises - Fund renovations, upgrades or extensions
- Asset protection - Property owned by a limited company if the business folds
For purchasing, expanding or improving your commercial property, a commercial mortgage for business owners could be the right choice for you.
Alternatives to a Commercial Mortgage
While a mortgage is a common way to finance commercial property, other options include:
Commercial Property Loans
Shorter-term loans, like bridging loans, fund purchases or renovations for 6-18 months. Higher fees and rates apply.
Leasing
Rather than buying a property, you can lease commercial space via a long-term rental agreement. This requires less upfront capital.
Business Loans
A regular business loan from a bank or alternative lender. This may be less advantageous, as property can't be used as collateral.
Peer-to-Peer Lending
Borrow from a pool of investors rather than a bank. This type of finance is typically easier to qualify but involves higher interest rates.
Asset Finance
Use specific business assets like machinery or vehicles as collateral instead of property.
Invoice Finance
Receive funding against unpaid customer invoices to improve business cash flow.
Each option has pros and cons to weigh up. Speaking to an adviser like Clifton Private Finance helps identify the most suitable finance solution.
Get Expert Commercial Mortgage Advice
Here at Clifton Private Finance, our commercial mortgage specialists offer a complimentary advice service and can help you choose the right finance solution for your business requirements.
Our broker team will help you source the most competitive business loans and commercial mortgage deal.
Our business loan service provides:
- Market-leading rates
- Fast service - finance within 5 to 7 days
- Access to specialist lenders
- Expert advice - professional service
As a specialist finance broker, Clifton Private Finance can provide a clear picture of your options. We will assess your circumstances and arrange a finance solution tailored to your needs.
