Essential Guide to Commercial Mortgages

A commercial mortgage is a loan that is secured against a commercial property or land for business purposes. Commercial mortgages are similar to standard residential mortgages as they are a long-term investment.

Why invest in commercial property?

A business property can be a good asset, producing profit from rent as well as appreciation in the property value. Typical investments include pubs, hotels, guest houses, restaurants, warehouses and industrial units, offices and even farms and other agricultural lands.

Who lends to who?

Commercial mortgages are offered by private banks and commercial lenders to offshore and onshore, Ltd companies, LLPs, individuals, pension trusts and more.

The commercial lending landscape today

Commercial lenders and banks are still lending, but at a reduced rate of appetite. The required deposit may be from 20% up to 40% or even more so it is undoubtedly a tricky time for the market. However, more and more commercial lenders are coming back to the market and there are some very competitively priced products currently available for the right investment.

Rates and fees

Buyers will typically pay a higher interest rate on commercial mortgages than regular residential mortgages due to the risk involved. The rates are dependant on the type of property and tenant, and can range from 2%-8% per annum.

Fees are very similar to a bridging loan.

  • Arrangement fee – 1-2%
  • Valuation fee – Commercial property valuations are usually more in-depth and therefore more expensive.
  • Legal fees – Similar to the valuation fees, a commercial mortgage can be more complex than a standard residential mortgage and as such legal fees are often higher.
  • Admin and broker fees.

What do the lenders look for?

One of the most important factors for the lenders to decide whether they want to lend their money is the tenant who will pay the rent when the property is let. In the current global pandemic, they will ideally want to see a tenant who has been able to keep paying their rent throughout. The strongest tenant types are essential shops and businesses with a strong covenant in place, such as large grocery or convenience shops. There are also certain tenant types that have their own specific issues -for example, lenders tend to approach takeaway shops carefully due to the fire risk.

In the current climate, if there is some residential element to the property, this can be helpful for the lenders as they will be able to use residential income if the commercial income has suffered.

They will also want to see that your business has a strong trading history and will ask to see evidence of the income, assets and liabilities of your business.

Lenders will typically ask for the following supporting documentation:

  • Bank statements covering the last 3-6 months
  • Trading figures covering the last 1-3 years
  • Proof of identity and address
  • Relevant lease/tenancy agreements
  • A business plan or forecast showing the lender you are able to make payments.

What should I look out for?

Like with standard residential mortgages, there are a few points to be conscious of, as well as being aware that a commercial transaction is often more complicated and comes with its own quirks.

  • Like with residential mortgages, commercial Mortgages are secured against the property, so if you default on your payments you’ll likely lose ownership of your investment.
  • In the current climate, the deposit on a commercial mortgage will be fairly large so it is vital to factor this into affordability to make sure you don’t get stung by the monthly repayments on top of this
  • You may be liable to sign a personal guarantee if the lender requests it.
  • Signing up for a long-term product at a time when the commercial lending landscape has suffered with unpredictability may be risky if you suddenly need liquidity.

Overall, a commercial mortgage can be a savvy investment for an experienced investor. However, the availability of these mortgages is largely dependant on tenant type and business security. In a pandemic where lockdown conditions and uncertainty have affected businesses’ viability, cash flow and ability to pay rent, getting a commercial mortgage can be tricky. Commercial bridging finance can sometimes be used creatively to bypass some of the issues of commercial mortgages, for example to build up a new company’s trading history in order to quality for a long-term product. Generally, your first port of call should be to speak to a commercial finance broker who can assess your circumstances and look for the best solution for you.