Commercial Mortgages

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Commercial Mortgages

James Mcgregor answers the most frequently asked questions on commercial mortgages.

What is a commercial mortgage and how do they work?

There are two types of commercial mortgage. First is an owner-occupier mortgage which is essentially like a residential mortgage. Owner-occupier is where your business operates out of that building and you obtain all your work from those commercial premises.

The other is a commercial investment mortgage which is similar to the Buy to Let market. These fund investment properties, where you own a property and rent it out to a commercial tenant.

Are commercial mortgage rates higher than residential?

Yes, they are by default. It costs a bank a lot more money to hold commercial assets. Having said that, there’s a big difference between owner-occupier commercial mortgages and commercial investment mortgages.

Similar to the residential vs buy to let world, owner-occupier commercial mortgages are normally cheaper than investment loans so you’re probably looking at rates from around 1.7% over base rate, up to probably 5% over base rate. On commercial investment mortgages you’ll probably start at around 3% over base rate and go up to 6%.

What criteria do I need to meet for a commercial mortgage, how much can I borrow and what sort of deposit is needed?

This is where it becomes slightly difficult in the commercial world compared to residential. There are certain sectors that will allow you to borrow 100% of the property cost, such as healthcare. A typical loan to value, however, is 75% for most businesses. It’s pretty similar in commercial investment mortgages, again 75%.

In terms of borrowing, for commercial investment it’s quite simple: it’s whether the rent covers the mortgage payments. But on owner-occupier it normally works on your EBITDA – your earnings before interest and amortisation. There are a few metrics that feed into that, but the main one is to service net profit before tax – that’s the figure used to service the lending.

What sort of fees and costs are involved? Do you pay stamp duty on commercial property?

Yes, you do pay stamp duty here. Unfortunately there’s no way out of that, but it is massively reduced compared to residential. Use the HMRC calculator for a quick look.

Mortgage arrangement fees are normally between 1% and 2% depending on the commercial asset or the business, and as I mentioned interest rates are anything from 1.75% up to 5.5% over base rate.

Is a commercial mortgage tax deductible?

Yes, as it’s a cost to the business it is completely tax deductible. I’m not qualified to give tax advice but I can confirm that it’s an allowable deduction.

How long is a typical commercial mortgage?

Again, it depends on the sector but anything from 15 years to 30 years – it’s similar to residential mortgages.

How do I apply for a commercial mortgage?

Most people will just go and ask their bank, which is how people used to do things years ago on residential. The reason for that is that commercial mortgage rates don’t get published – so it’s very easy for the banks to make more margin. When they are quoting directly to a client, the client doesn’t know whether a rate is good or bad.

The big benefit of coming through advisers is that when the bank quotes to us, they know we will be negotiating with at least one or two other lenders. So they have to quote the absolute best pricing for that sector and asset, otherwise they may lose the business.

A broker will save you time and money and make the whole process so much easier. We have a full team that will pick this up and take it all the way through to completion. In a commercial mortgage process, once it gets to the legal team things can be very challenging.

Can I remortgage my commercial property?

Yes, definitely. Most commercial mortgages have an early repayment charge, so it’s best to double check the fees involved, but there is definitely an opportunity to seek out a better deal with cheaper pricing. You can also remortgage to release equity to invest in your business, buy other assets or help with cashflow in the business.

There’s a number of reasons why people would want to look at refinancing their commercial assets and it’s not normally too difficult, as long as the business is profitable and can afford the lending.

What other advice do you have on commercial mortgages?

The key thing is to get in front of an adviser as early as possible. We’re here to look after your best interests in your particular situation. If you go direct to the bank they can only quote you on their product offering – which probably won’t be the right lender for you.

Your home may be repossessed if you do not keep up repayments on your mortgage. The Financial Conduct Authority does not regulate some Buy to Let Mortgages.