If you're looking to buy a property for a business, you'll probably need a commercial mortgage to finance your purchase.
Before you begin your mortgage search, it's crucial that you understand your monthly mortgage repayment budget and the potential growth of your business.
Sourcing the best lender for you
Like a residential mortgage, you should always search the market for the best possible deal for you. Although the high street is an obvious starting place, they may not have the most competitive deals available. You should actively consider using the services of an impartial, specialist commercial mortgage broker that covers the whole market.
A broker will scour the market for the best deal and the most appropriate deal relevant to your business sector. Your broker should then continue to search for the market going forward in order to make sure you are constantly benefiting from the best rates available.
You can search for a specialist mortgage broker at the National Association of Commercial Finance Brokers.
Generally, commercial mortgages are for 15 years or more, and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments. The majority of mainstream lenders offer commercial mortgages, but it's important that you can meet their lending criteria.
Although some lenders may still accept applicants or businesses with an adverse credit history, it helps if you can show a clean credit record, as this will give you greater choice and a more competitive deal. Lenders will apply a loan to value ratio to the mortgage and will often require you to invest some of your own money into the property. The more of your own money you invest, the more chance you will have of securing the mortgage.
The lender will also want information about your business and will be looking to see if it is profitable. They may request your business accounts and projections to check that the business has longevity and is not under any immediate financial pressures.
Some lenders may impose restrictions on the property, such as the ability to sub-let to other businesses, so you should seek professional advice from your solicitor, and if required, a chartered surveyor.
What information will the bank need?
Most lenders will request a lot of commercial information and it is worth preparing this from the start in order to help your application run smoothly. The information might include documents on the performance of the business.
Remember, the main concerns of any lender will be whether you can afford to repay the loan and, should you default, whether the property is worth enough to cover the value of the loan.
Should you be buying a commercial property and a business together, you may need to provide additional information, such as:
- Audited accounts for the last two years
- A profit and loss forecast for the next few years
- Current business performance
- The personal details of the key stakeholders in the business for credit-checking
- Asset and liability statements for each applicant
- A business plan detailing how the property will contribute to your cash flow and how you plan on repaying the loan
- The credit status of the business
- Reasons why the business is being sold
- Details of any personal investments involved
- Growth projections for the business
Repaying the mortgage
The mortgage repayment options are similar to those in the residential mortgage market, although you can expect to pay a slightly higher rate of interest, as commercial mortgages are generally seen as a higher risk to lenders. This is where it helps to have a big deposit, as a deposit of less than 20 per cent may mean you pay a much higher interest rate to offset the increased risk to the lender.
In the commercial mortgage market, the majority of deals are either fixed rate or variable rate. Fixed rate deals are usually between two and five years and can provide you with repayment stability if this is required, although you won't be able to take advantage of any falls in the base rate. On the other hand, taking a variable rate mortgage will allow you to benefit from any reductions in the base rate, but will also mean repayments may increase if the base rate increases.
The specific repayment options available are similar to those found in the residential mortgage market. A repayment mortgage option (where you pay the capital and interest back each month) means you will have all your bases covered in repaying what you have borrowed. You can also choose an interest-only mortgage, where you only repay the interest back each month on the amount you have borrowed. If you choose this option, the lender will almost certainly seek evidence of an appropriate insurance or investment policy that will cover the outstanding capital at the end of the loan term.
Other fees and costs to consider
There are additional costs associated with taking out a commercial mortgage and you should take these into account before you embark on your mortgage search, or seek clarification from your lender or broker.
- Arrangement fees (usually between 0.5 per cent and 1.5 per cent of the loan value)
- Valuation fees (the cost of the lender undertaking a survey on the property to establish its value)
- Legal fees (including legal documents, insurance and your own surveys)
- Redemption penalties (a fee payable to the lender if you pay off your mortgage before the agreed term)
As with any mortgage, you should always seek the appropriate professional and legal advice before taking out a commercial mortgage.