Are you considering applying for commercial mortgages but don’t know where to start? Well, you’ve come to the right place.
For business owners, understanding how to finance the growth of their company is crucial for long-term success. One way businesses have traditionally funded these expansion plans is through commercial mortgages offered in the UK.
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But what do you need to know about them? In this article, we’ll take a look at what UK commercial mortgages are, and what to consider when applying for one.
Best commercial mortgage lenders UK
| Mortgage lender | Max. Loan to Value ratio | Max. term | Max. lending |
|---|---|---|---|
ABC Finance | 80% | 30 years | Not stated |
Aldermore | 75% | 20 years | £25 million |
Assetz Capital | 75% | 20 years | £10 million |
Barclays | Not stated | 25 years | Not stated |
Clydesdale Bank | 70% | 20 years | Not stated |
Cambridge & Counties Bank | 70% | 25 years | £15 million |
Cumberland Building Society | 75% | 30 years | £2 million |
Cynergy Bank | 70% | 10 years | Not stated |
HSBC | 75% | 30 years | No maximum |
ICICI Bank UK | 60% | 7 years | £25 million |
InterBay | 80% | 30 years | No maximum |
Landbay | 80% | Not stated | £2 million |
Lloyds Bank | 70% | 25 years | Not stated |
Mansfield Building Society | 75% | Not stated | Not stated |
NatWest | Not stated | 25 years | £10 million fixed, no limit on variable |
Paragon Bank | 75% | Not stated | £1 million or £10 million for portfolios |
Proplend | 75% | 5 years | £5 million |
Rangewell | 80% | 20 years | No maximum |
Redwood Bank | 70% | 25 years | £5 million |
Royal Bank of Scotland | Not stated | 25 years | £10 million fixed, no limit on variable |
Satellite Finance | 75% | 30 years | £40 million |
State Bank of India (UK) | 70% | Not stated | Not stated |
Together Money | 65% | 30 years | £250,000 |
TSB | 70% | 25 years | Not stated |
West One Loans | 75% | 25 years | £1.5 million |
Yorkshire Bank | 70% | 20 years | Not stated |
What is a commercial mortgage?
A commercial mortgage is a loan used to purchase, renovate, or refinance a commercial property. Unlike residential mortgages, which are usually secured by the home itself, commercial mortgages are typically obtained through banks and other lenders and secured by the underlying real estate property.
Commercial mortgages typically carry higher interest rates than residential mortgages but also come with more flexible repayment options.
Additionally, commercial mortgages may also require the borrower to provide additional collateral or security in order to secure the loan. Commercial mortgages are often used by businesses in need of financing for business expansion or renovation projects.
They can be used to purchase a new property, expand existing properties, buy out another company’s leasehold interest, refinance existing debt, or purchase equipment.
How does a commercial mortgage work?
The applicant borrows a lump sum of money to pay for a commercial premises or renovation, and then repays the debt to the lender of a period of time, plus interest.
A commercial mortgage is typically a loan that is secured by a lien on real property. This means that the lender has the ability to seize and sell the property if the borrower defaults on payments.
The loan is usually for a fixed amount of money and has a fixed interest rate and repayment term. The lender will also require certain documents from the borrower to prove their ability to repay the loan, such as income statements, balance sheets and other financial records.
The repayment schedule of a commercial mortgage is usually determined by the lender. It may include a balloon payment at the end of the loan term, where all remaining debt must be paid off in one lump sum.
The borrower will also need to make monthly payments on the loan each month and pay interest as agreed upon by both parties.
Commercial mortgage rates explained
Commercial mortgage rates vary based on the type of loan, the size and terms of the loan, and the creditworthiness of the borrower. Generally speaking, commercial mortgages have higher interest rates than residential mortgages, but this is not always true. It depends on several factors including market conditions and risk profile.
Interest rates may be fixed or adjustable, and the borrower may be able to negotiate a lower rate based on their creditworthiness. Additionally, borrowers may also be able to lock in an interest rate for a certain period of time or choose from a range of adjustable rates.
The length of a commercial mortgage is typically between five and twenty-five years, although some lenders offer longer terms. The long-term nature of commercial mortgages makes them a good option for borrowers who need long-term financing or those who are unable to secure a traditional mortgage loan.
How to get a commercial mortgage?
In order to obtain a commercial mortgage, borrowers usually need to have strong credit and a well-thought out business plan. Lenders will also require financial statements and other documents that prove the borrower’s ability to repay the loan.
How to get a commercial mortgage
- Gather documents
Lenders will need to see financial records, personal tax returns, and other documents that show your business’s ability to repay the loan.
- Create a business plan
This document should include information about your company, its products or services, marketing strategies, and how you plan to use the money.
- Find a lender
Research lenders to determine which one is best for your needs and what type of loan you qualify for. Get professional advice if needed.
- Check interest rates
Compare interest rates from multiple lenders to ensure you are getting the best deal.
- Calculate monthly payments
Estimate how much you will need to pay each month on the loan.
- Apply for a loan
Submit your documents, business plan, and application for a commercial mortgage.
- Review the terms of the loan
Make sure that all aspects of the loan are agreeable before signing any documents or accepting any funds.
- Secure collateral
Many lenders require some form of collateral in order to secure the loan.
- Sign documents
You and your lender will need to sign all necessary documents in order for the loan to be finalised.
- Make payments
Once you have signed the documents, make sure that you keep up with all monthly payments in order to avoid defaulting on the loan.
It is important for potential borrowers to shop around for lenders, as different banks offer different terms and rates. Additionally, borrowers should make sure to read through the terms and conditions of any commercial loan before signing it, in order to avoid any unwelcome surprises.
Overall, obtaining a commercial mortgage can be a complicated process but with the right planning and preparation it can be done successfully.
How much deposit do I need for a commercial mortgage?
The amount of deposit required for a commercial mortgage depends on the lender and type of loan. Generally, lenders require a minimum down payment of 25 to 30 percent for most commercial mortgages.
However, some lenders may require higher deposits depending on the risk associated with the loan.
Other factors that may influence the deposit requirement include creditworthiness, income level, and the type of property being purchased.
It’s important to keep in mind that a larger deposit will typically result in a lower interest rate and more favorable loan terms, while a smaller deposit may result in higher interest rates or less favorable loan terms.
FAQ – Commercial mortgages in the UK
A commercial mortgage is a loan used to purchase, refinance, or develop a commercial property, such as an office building, retail space, industrial property, or other types of business real estate. It’s typically used by businesses or individuals looking to invest in property for business use or rental purposes.
A commercial mortgage works similarly to a residential mortgage, where the borrower borrows money from a lender (usually a bank or financial institution) and repays it over a set period, typically 15 to 25 years. The property purchased acts as collateral for the loan. If the borrower fails to repay, the lender can seize the property.
Businesses, sole traders, partnerships, or individuals looking to buy or refinance commercial property can apply for a commercial mortgage. However, lenders will usually require the borrower to have a solid business plan, a good credit history, and sufficient income or capital to cover loan repayments.
A commercial mortgage can be used to buy various types of properties, including:
Offices
Retail stores
Warehouses and industrial units
Hotels and guest houses
Multi-tenant residential properties (like apartment blocks)
Mixed-use properties (business and residential spaces)
While both commercial and buy-to-let mortgages involve purchasing property to generate income, the key difference is the type of property and the borrower’s intent:
Commercial mortgage: Used to purchase or refinance properties used for business purposes, such as offices or warehouses.
Buy-to-let mortgage: Used to purchase residential properties with the intention of renting them out to tenants.
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The amount you can borrow depends on several factors, including:
The value of the property
The loan-to-value (LTV) ratio (usually between 60% and 75%)
Your business’s financial health and credit history
The type of property
Rental income (if applicable)
In general, lenders will lend between 60% and 75% of the property’s value, but this can vary.
The Loan-to-Value (LTV) ratio is the percentage of the property’s value that the lender is willing to lend. For commercial mortgages, the typical LTV is around 60% to 75%, although it can be higher or lower depending on the lender and the specifics of the loan. A lower LTV typically means a lower risk for the lender, but you may need to contribute more in terms of a deposit.
Interest rates on commercial mortgages tend to be higher than residential mortgages. Rates can vary depending on factors such as:
The type of property being purchased
The financial strength of the business
The size of the loan and the LTV ratio
Whether the mortgage is fixed or variable
Rates typically range from around 3% to 7%, but they may fluctuate depending on market conditions and lender criteria.
It can be more challenging to obtain a commercial mortgage with bad credit, as lenders usually assess your creditworthiness when deciding on loan terms. However, some lenders specialize in offering commercial mortgages to borrowers with less-than-ideal credit histories. You may be required to pay higher interest rates, provide a larger deposit, or offer additional security to increase the lender’s confidence.
The term of a commercial mortgage typically ranges from 10 to 25 years, although this can vary depending on the type of property, the borrower’s needs, and the lender’s policies. Shorter terms of 5 to 10 years are also common, especially for development projects.
Yes, you will generally need a deposit for a commercial mortgage. The deposit is typically between 25% and 40% of the property’s value, depending on the lender, the loan amount, and the type of property being purchased. The larger the deposit, the lower the LTV ratio, which can result in better terms and lower interest rates.
Yes, if the commercial property you’re purchasing generates rental income (e.g., a multi-let building or a property with tenants), the rental income can be used to help cover the mortgage repayments. Lenders often take this into account when assessing the affordability of the mortgage.
There are several fees that may be associated with a commercial mortgage, including:
Arrangement fees: Charged by the lender to set up the mortgage.
Valuation fees: To assess the value of the property.
Legal fees: For both your solicitor and the lender’s solicitor.
Surveyor fees: To conduct a property survey (often required by the lender).
Early repayment charges: If you pay off the mortgage early.
It’s important to factor in these costs when budgeting for a commercial mortgage.
Yes, you can remortgage a commercial property to take advantage of better interest rates, access additional capital, or switch lenders. Remortgaging typically involves going through a similar process as applying for an initial commercial mortgage, including property valuation, credit assessment, and possibly legal fees.
Yes, if you already own a commercial property, you may be able to remortgage it or use it as security to obtain additional funds. This can be helpful if you want to expand your business, make improvements to the property, or release equity.
As with any type of loan, commercial mortgages come with risks, including:
Repayment difficulties: If your business struggles financially, it may become difficult to make repayments, risking repossession of the property.
Interest rate fluctuations: If you have a variable-rate mortgage, changes in interest rates can increase your repayments.
Property market risks: The value of the property could decrease, impacting your ability to refinance or sell it if needed.
It’s essential to carefully consider your business’s financial position before committing to a commercial mortgage.
To apply for a commercial mortgage, you will need to:
Choose a lender or mortgage broker
Submit an application, including your business details and financial information
Provide documentation, such as business plans, accounts, and property details
Undergo a property valuation and possibly a survey
Await approval and receive an offer
It’s recommended to work with a mortgage broker who can help you navigate the process and find the best deal.