In a nutshell, a Commercial Mortgage is a loan secured on property or real estate that is used primarily for business purposes.
However, this is a very broad definition of a term that is used to cover anything from a loan to buy a factory, shop or warehouse unit to development finance, non-regulated bridging finance and even buy to let mortgages.
There is even a derivative known as a Semi-Commercial Mortgage, which is typically used to describe a mortgage used to purchase a shop with living accommodation above it or any other similar business premises that incorporates living accommodation.
How Do I Qualify For A Commercial Mortgage?
This really depends on the type of financing or mortgage loan that you are going to need. Lenders have different criteria for differing scenarios and the interest rates charged are based more upon the perceived risk of the loan to the lender than just the loan to value ratio.
For a lender to consider your business proposal you will need to show that you have a viable Business Plan in place and be able to demonstrate that you will be able to afford the monthly repayments. A common misconception is that you will automatically have to produce three years accounts in order to qualify for a commercial mortgage or business loan. This is not necessarily the case. Indeed, a business start up with no track record can be eligible for a business loan or commercial mortgage if the Business Plan, Cash flow forecasts and serviceability of the loan meet the lender’s criteria. This is particularly relevant for Buy To Let mortgages on residential property, which can be either in the names of individuals or Limited Companies, where the whole of the property to be mortgaged is to be let. Similarly, a newly formed Limited Company or an individual or partnership can purchase an industrial or retail unit with the aid of a commercial mortgage if the rental income and the Lease Agreement are acceptable to the lender. Every case is assessed on its merits and if you are considering commercial finance of any description you should always seek independent advice from a suitably qualified finance specialist. Most mortgage brokers deal predominantly with residential mortgages. Commercial finance is a specialist field and you should therefore make sure that you are dealing with an experienced business adviser and commercial finance specialist. To be successful, your proposition needs to be seen in the best possible light by a lender and for that to happen it needs to be presented professionally by an adviser who fully understands your circumstances, aims and objectives and who has access to not only the main High Street banks, but also the Challenger Banks and specialist commercial lenders and finance providers.
How Much Can I Borrow?
Commercial or Business Mortgages traditionally have a lower maximum LTV (loan to value ratio) than residential mortgages. However, if you have suitable additional security, it can be possible to borrow the full amount (100%) of the purchase price of your new business premises or commercial property. Different commercial propositions attract different rates at different LTVs. For example, Buy to Let mortgages are available for up to 85% of the property’s value whereas you will find that, without additional security, a loan for the purchase of a warehouse is likely to be limited to only 65% or 70% of its value. Interest rates for commercial mortgages cannot be compared in the same way as residential mortgage rates as each case is individually assessed. The minimum loan is usually £25,000 but the maximum loan amount will depend on many variables; such as the LTV, property value and individual lender criteria as well as your perceived ability to repay the advance.
When Should Bridging Finance Be Considered
Bridging Finance used to be considered too expensive for general consideration when assessing a corporate financing proposition. However, a combination of low base rate, greater appetite to lend, greater choice of lenders and products and the subsequent competition for this type of business has meant that Bridging Finance has become increasingly popular in recent times for a variety of reasons.
Bridging Finance is a short term loan, typically of six to twelve months duration, secured on suitable residential or commercial property. It can be used to ‘bridge’ the gap between the purchase of a property and its conversion to being suitable security for a full term commercial loan. For example, I recently dealt with the purchase of a property that comprised a fully operational café on the ground floor with living accommodation above that was in need of total refurbishment. The property in its condition at the time the sale was agreed was not deemed as being suitable security for a long term semi-commercial mortgage, but the lender was prepared to offer a short term bridging finance deal for 65% of the purchase price to allow time for the living accommodation to be brought up to a suitable standard to be let out. The initial term of the bridging finance loan was six months but with an option to extend for a further six months if required. The clients completed the purchase of the premises, used their own funds to refurbish the living accommodation and then remortgaged the premises at the end of the six month period with another lender on a 20 year commercial mortgage at competitive rates.
Another typical use of Bridging Finance is for the purchase and refurbishment of Buy To Let properties. Indeed, I have dealt with a number of professional landlords who have made their fortune through the use of bridging finance deals. You may have seen the TV series ‘Homes Under The Hammer’ which shows properties in need of refurbishment being sold at auction to prospective landlords and then given a makeover before either being let out to tenants or sold to owner occupiers. Many of these properties will have been purchased using bridging finance and then remortgaged to a long term Buy To Let mortgage once the refurbishment is complete. You do need to be cautious if you are considering going down this route as there are some strange rules enforced by many specialist Buy To Let lenders. Most will limit the number of properties they will allow you to hold in mortgage to them and as well as not permitting you to remortgage a property that you have owned for less than six months. Buy To Let lending is a specialist area and you must make sure your business or mortgage adviser is a specialist in this field. The recent tax changes have made it less attractive for many landlords to own portfolios as individuals and many have switched to using an SPV (Special Purpose Vehicle) Limited Company for new purchases. If you are looking to venture into this market then I would strongly recommend that you consult a specialist tax adviser before deciding whether to purchase as an individual or via an SPV.
An Alternative Definition!
As both a specialist commercial mortgage adviser and an experienced business consultant I would like to offer you this alternative definition of a commercial mortgage:
‘A Commercial Mortgage is the vehicle used to purchase or refinance property or real estate that will contribute to the profitability of your business.’
If you are considering commercial or business finance of any description then take some time to consider this definition – it may save you from making an expensive mistake. Above all, make sure that you seek out specialist independent advice specific to your individual requirements before committing yourself and your business to a long term liability.