A commercial mortgage is a type of financing for the purchase of a property intended for commercial use.
There are two main uses for a commercial mortgage:
Owner-occupant mortgage: It is for businesses wishing to purchase instead of renting premises. They to occupy as a workspace or expand their existing operations area.
Buy-to-let financing: Fit for investors who seek to gain from buying a residential or commercial property for purposes of renting. Indeed, they can use the rental income to pay for the mortgage. Hence, investors also can gain if the property market rises.
How does commercial mortgage works?
In a commercial mortgage, lenders require collateral. Typically, the property you purchase is set as collateral. So, if you default the loan, the lender will take your asset to liquidate as compensation for their loss.
In the United Kingdom, lenders can release as much as 70% to 75% of the property’s purchase price. Hence, they require that you fill in the remaining balance. Some lenders are willing to go beyond the maximum loan-to-value ratio. Such an arrangement is a welcome offer if you can’t pay for the balance outright. But have another asset to pledge, and the lender accepts as collateral.
How to qualify in commercial mortgage
The lenders have essential criteria set for applicants to meet before giving approval. Consequently, it will offset the high risk of commercial mortgage borrowing.
Your credit rating: your credit profile shows how responsible you are in handling your debts. It also shows your punctuality in repayment terms.
The deposit you can afford: the average maximum borrowing lenders can provide is 70% of the property value. This means you should prepare to shell out for the remaining balance. Some lenders, however, can apply maximum loan amounts when your deposit falls short of the minimum deposit amount.
Your monthly net income: this derives from all sources such as salary, commission, bonus and business profit. The total should also deduct all monthly expenses to check how much you are left within a month. It will check if the income suffices to pay back for the loan. If you are purchasing as a group, the income of individual buyers will be summed up.
The type of borrower: lenders will look into whether you are an individual or trade as a limited company.
Meanwhile, there are some areas of standardisation drawn out differently between owner-occupant mortgage and buy-to-let financing.
For the first type, since the owner of the business will be the occupier of the place and payer of the mortgage, lenders will look at the financial strength of the company and its capability to fulfil its obligations within the terms of the contract.
For buy-to-let financing, lenders prefer loan applications from people with experience in property development. However, novices are welcomed if guided by expert advisors.
Various lenders from high street banks to niche alternative lenders offer commercial mortgages. Furthermore, the calculation of most of the interest rates for this borrowing is on variable terms. It means that monthly repayments can go up or down depending on interest rates. Hence, there are numerous lenders flexible in tailor-fitting your options for repayment.
Here are some of the widely tapped lenders that offer a wide range of fixed and variable rate mortgages:
Loan tips: Things to consider
The valuation method used: Understanding the way your lender uses in the estimation of the property’s purchase price is critical. It determines the maximum loan-to-value loan, as well as the minimum deposit requirement.
- Open market value: the basis of the best price is on certain assumptions. These assumptions will as to what price they can sell the property.
- 90-day forced sale value: You expect the value that the property will sell in a sale situation. It is typically the fate of a mortgage that went default. It factors in the urgent need to liquidate the property. The method yields lower pricing than other valuation methods.
- Going concern value: It is the most suitable for a business that is already occupying the property. The method puts a value on the traffic pulled in by the company operating in the property
There are several additional fees to consider: Some lenders levy one or more kinds of extra payments. The payments will cover the arrangement of the purchase, valuation exercise, and legal representation for you and the lender. It can be costly if conditions in purchasing the property is more complicated.
If you’re engaging a broker, expect to pay a fee of up to 1% of the loan value, the usual price brokers seek in exchange for their services.
You could rent a portion of the premises to another company: Some lenders allow for such an arrangement, making for an excellent option to make sure that you keep up with those monthly repayments.