Whether you’re an established business owner or someone looking to set up their first business premises, getting a mortgage on a commercial property is a big step. It’s a valuable asset that will provide for years to come. As such, the purchase of a commercial property, including its mortgage, should be done properly. However, mortgages for business use properties are slightly different than mortgages for home properties.
In this blog, Toomey Legal will guide you through the process of applying for a commercial mortgage, whilst covering useful information relating to this finance.
What is a commercial mortgage?
As the name implies, commercial mortgages are used for the purchase or refinancing of a property for commercial use. The loan can be used for a variety of buildings, from offices to shops to factories. A commercial mortgage can also finance developments and refurbishments to existing properties.
A commercial mortgage functions very similarly to a regular one, albeit with some notable differences. The interest rates offered by commercial mortgages differ on a case-to-case basis depending on a number of factors. However, the rate is typically higher than that of a residential home mortgage. This flexibility is furthered by the fact that many commercial mortgages are not regulated.
Types of commercial mortgage
Commercial mortgages can vary due to the nature of the property and how it is intended to be used. This has the potential to influence the success of borrower’s applications. Commercial mortgage types include:
- Owner occupied – purchasing a property that you intend to trade from. This mortgage can finance premises for a new business, a property for business expansion, or to purchase the property the business currently rents.
- Commercial investment – used for buy-to-let properties. This can be on either a residential or commercial basis.
- Semi-commercial – designed for the purchase of a property intended for both residential and commercial use. Common examples are shops with flats above them.
Applying for a commercial mortgage
The first step in applying for a commercial mortgage is to determine whether you qualify for one. Lenders will subsequently check certain things to get an indication of the applicant’s property investment experience. As such, it’s recommended that borrowers can prove the following:
- They are a homeowner
- They have owned some number of buy-to-let properties for at least two years
- They have a 20-30% deposit
- They possess savings in the bank
- Evidence of income from salary, rent, and self employment sources
Meeting these criteria is not essential to secure a commercial mortgage loan. However, it will improve your chances of receiving finance. Absences in the above can lead to higher prices for borrowers.
The process of securing a commercial mortgage is comparable to that of a residential property. The main difference is that the focus is on the financial position of the business, as opposed to the individual. This typically means examining more documents. So, while some steps are familiar, they might vary in their requirements. These steps include:
- Fill out and submit the Asset and Liability form.
- Complete the commercial mortgage application form.
- Provide relevant business information such as trading figures, bank statements, outstanding lease or tenancy agreements, and proof of identity.
- Carry out a property valuation.
- Solicitors see that all legal due diligence is carried on the part of the lender.
- Approval is signalled by a mortgage offer from the bank.
Financing a commercial mortgage
Rates for commercial mortgages will be above the Bank of England base rate and subject to additional arrangement fees. However, the exact cost is not set until the application process begins. The cost of a commercial mortgage is determined on multiple factors, each of which will vary between borrowers. These factors are used to create an overview of the business and how the property will be of benefit. This includes:
- Business cash flow and debts to be paid
- Loan to value calculations
- The presence of a Personal Guarantee
- The parties who will be using the property and why
The first way to help finance a commercial mortgage is with short-term loans. This is often an effective form of financial relief that doesn’t form long term commitments. A short-term loan can cover expenses relating to business and legal services, working capital, and cash flow.
Bridging loans are designed to help buyers complete the purchase of a property quickly. It aims to avoid the scenario wherein an individual sells their existing property before they are able to move into the newly purchased one. Bridging loans are another form of short-term finance and can typically be arranged within two weeks.
Finally, borrowers have the option of taking out personal loans. These can be accessed regardless of whether or not the applicant is a homeowner. It should be noted that each of these loans comes with its own application process, which can increase the complexities in getting a mortgage for a commercial property. As such, it’s often recommended that commercial buyers/borrowers seek professional conveyancing advice to ensure the purchase runs to schedule.
Commercial conveyancing solicitors Washington
If you’re a business looking for local conveyancing quotes Tyneside or services for conveyancing Whitley Bay, Toomey Legal can help. We are commercial conveyancing experts that can support your business through many important developments. This includes fee calculation, commercial property leases, and commercial property mortgages. Contact us today.
*Toomey Legal are dedicated conveyancing specialists. As such, we do not conduct property surveys, give tax advice or mortgage advice.