In basic terms, a commercial mortgage is any loan that is taken out on a property that is not the borrower’s place of residence. While “commercial mortgage” is a blanket term for any financing on a non-residential property, there are a number of specific types of commercial mortgages that cover a variety of different types of properties, such as semi-commercial mortgages and buy-to-let mortgages.
For example, buy-to-let mortgages are a type of high volume mortgage that is packaged for that specific type of property. Because of the varying types of mortgages out there, lenders generally access commercial loan applications on a case-by-case basis and estimate price based on the overall risk.
When Are Commercial Mortgages Most Often Used?
In general, commercial mortgages are used to purchase a commercial property when the initial business loan has ended. Business loans traditionally go up to an amount of £25,000 without security and lenders will require some type of security for any loans over this amount in order to protect themselves from any financial risks.
Since the administrative, legal, and purchasing costs of commercial properties are much higher than this amount, borrowers will usually opt for a higher amount in a commercial loan. Lenders will sometimes only allow commercial mortgages for a minimum amount of £75,000 with security since lending under £50,000 using this strategy generally does not make economic sense.
What Security is Needed for a Commercial Loan?
Traditionally, the only security a lender will accept for a commercial mortgage is the property that is being purchased by the borrower. This security is usually taken for up to 70 percent of the property’s value, in which case the borrower will need to provide the additional 30 percent of the purchase price through cash or their own financing.
In some cases, if the borrower does not have the 30 percent additional cash or funds at their disposal, they can offer lenders additional security options to make up the difference. This additional security is usually in the form of additional owned properties that are not the borrower’s residence and that hold considerable equity or other assets such as insurance policies.
How Long are the Terms for Commercial Mortgages?
Repayment terms for commercial loans generally range between three and 25 years. Although this is the normal span of time, some shorter financing terms are available through specialised lenders – these shorter term loans are sometimes categorised as property development finance or bridging finance.
These types of loans and financing have a much shorter repayment term, which can last between a few weeks and as long as two years. Bridging finance is generally used as a short term financial solution to “bridge the gap” between starting a development or commercial project and securing a mortgage. Since these are not long term solutions, it may not be the best option for large commercial property purchases.
How Much Funding can be borrowed?
When seeking a commercial loan for an owner occupied property, it is very easy to find a lender who is willing to offer between 70 and 75 percent of the property’s value. For buy-to-let or rental properties, lenders will look at the projected rental income of the space and will offer up to 65 percent of that amount in the form of the mortgage.
If the property is a business which includes stock, goodwill, and other factors, lenders will generally offer less than 65 percent of the property’s value. There is no set amount of percentage of funding that is offered by lenders through commercial mortgages – each application is processed and reviewed on a case-by-case basis for each unique situation.
What Fees Should Be Expected?
There are a number of fees that are included in the process of applying for and obtaining a commercial mortgage. The three main charges include legal fees, arrangement fees, and valuation fees. When it comes to legal fees, it is important to note that the borrower will be required to pay his or her own fees as well as the legal fees of the lender.
Legal fees vary greatly in complexity from one case to the next and generally start around £500 per party. Arrangement fees are traditionally added to the amount of the loan when it becomes complete, but some lenders will require borrowers to pay these fees upfront to cover some of the costs of the work they have put in to arranging the mortgage. In some cases, they may charge a commitment fee as part of the arrangement fee, which is paid with the formal application.
The final standard charge is the valuation fee. Since commercial properties vary much more than residential properties, a valuer will be required to visit the space and provide a lengthy report to the lender. Commercial valuations are more expensive than residential since the valuer must visit the property to make his or her report – since residential properties are similar, it does not always require a visit from the valuer, making them less expensive.
Valuation fees generally start around £500 for an easy report but depending on the complexity of the case, there is no set price for what the valuer chargers for his or her services. The valuation fee is paid to the lender after the initial offer has been accepted.
Should I Utilize a Broker to Arrange a Commercial Mortgage?
When arranging large financing loans such as a commercial mortgage, it may be in the borrower’s best interest to seek the help and guidance of a professional mortgage broker. These specialist have contacts within the financial sector and a deep knowledge of the marketplace, making them an invaluable asset for those looking for commercial loans.
Brokers will help to compare commercial mortgages to help find their clients the best possible deal for the unique situation. Finance brokers generally charge a broker fee that is up to one percent of the loan’s overall value. It is important to note that a borrower should not agree to pay anything to the broker until a loan is produced and terms have been pre-agreed upon.