Are there any restrictions or fees?

Restrictions may apply to any property that is used to secure a loan (in the absence of a full deposit). Some lenders will value the property according to its remaining equity (as opposed to market value), while damaged properties or those unlikely to sell are often disregarded. In addition, leaseholds with less than 70 years remaining may necessitate additional security.

There are also a number of additional fees associated with commercial mortgages. These include:

• Arrangement fees: These are usually charged upon completion of the loan at a rate of 1-2% of the borrowed amount (although they can be higher on loans less than £1 million).
• Valuation fees are charged against a borrower’s application and vary according to how complex the report is. Simple valuations start from around £500.
• Legal fees: These are paid by the borrower in respect to both the lender’s legal fees and their own. These will vary according to each case but can start at around £500 for each party.
• Broker fees usually amount to up to1% of the loan value.
• Stamp Duty, though lower for commercial properties, still needs to be taken into account.

Who can I borrow from?

In terms of lenders, high street banks invariably offer the best rates and the best loan to value mortgages. However, they can demand a high level of income and cash flow to repay debt obligations and the application process can be lengthy (often over three months). Challenger banks will offer a more lenient lending criterion, but they are generally more expensive than their high street counterparts and have higher exit fees. Niche or specialist lenders offer the lowest affordability criteria but are more expensive still than the banks.

What is a commercial mortgage?

Commercial mortgages are loans which are secured against a non-residential property. They are used to buy or re-mortgage business premises, such as offices, warehouses, hotels or shops, although they can also be used on part commercial, part residential ‘mixed use’ properties or to develop new or existing premises for residential letting. There are two distinct types of commercial mortgage available on the market place; one which allows for trading or expansion purposes (owner-occupied) and another which caters to investors who wish to rent their property (commercial buy to let).

Residential buy to let mortgages also exist. Different rates and finance rules will apply to whichever of these options are chosen, but as a rule of thumb most lenders will set a minimum borrowing limit of £75,000. This is because of the various legal and administrative costs that are incurred in taking security on a commercial property (although business loans of up to £25,000 are usually unsecured). Commercial mortgages typically run from 3 to 25 years in length.

How much can I borrow?

This will depend upon what you want to do with your property; what type of business you run and the length of time you have been trading for. Businesses such as offices or shops, for example, will often command a maximum LTV ratio of around 75-80%, while commercial buy to let investment properties will invariably have a lower LTV (usually no more than 65%) and will be charged at a higher rate of interest. New businesses or businesses with a limited trading history can expect to receive a LTV ratio of around 50% of the purchase price and this will obviously push the amount needed for a deposit to a very high level.

The vast majority of commercial mortgages are offered at a variable rate, although it is possible to find fixed mortgages (especially for loans under £50,000). Rates are charged in relation to the level of risk associated with the loan, however because the overall risk associated with commercial mortgages are regarded as higher than for residential mortgages, interest is generally higher.

How do I get a commercial mortgage?

As with any conventional type of mortgage, a lender’s criterion is defined by an applicant’s ability to repay the loan. Lenders will require evidence that a borrower’s business is profitable therefore, with at least two (or in some cases three) years of filed accounts (if you are trading as a limited company), and a detailed repayment plan. Most lenders will expect a deposit of at least 30%, although it is sometimes possible to use another property as an additional security if you can’t afford this. Investors looking to develop commercial properties for letting purposes meanwhile, will need to show that they own (or have owned) at least two buy to let properties and that they have had experience of the sector for a minimum period of 12 to 24 months (depending on the lender).

Are commercial mortgages regulated?

Unlike residential mortgages, most commercial mortgages are not regulated. The only major exception to this rule occurs if 40% or more of a property secured against a loan is residential.