What is a commercial mortgage?
Most commercial mortgages are most commonly known in the form of Buy to Lets (BTL’s). Where individuals or companies purchase a property with the intention to let or lease it out. However commercial mortgages are also taken out to purchase business premises for companies to operate from. Not forgetting commercial mortgages are available for the purchase of land too.
What is the difference between a Commercial Mortgage and a Residential Mortgage?
A commercial mortgage is a loan for an asset that isn’t your residence or home. [I say ‘asset’ and not ‘property’ as this then includes land purchases.]
So by contrast a residential mortgage is a loan for a property that you indent to live in. For example if you required a mortgage for a second home, this would still be classed as a residential mortgage as you intend to live in it.
Hopefully that cleared that up and shed a few myths about what a commercial mortgage is and their intended purposes.
How does a commercial mortgage work?
So they work like any other mortgage actually. The lender lends against the asset, over an agreed term. The agreed repayments are then made monthly to the lendee. This is true even if you wish to purchase a new asset using a commercial mortgage or if you already own the asset and you wish to obtain a mortgage against it.
Mortgages tend to come into play where business loans stop, this is because business loans are typically issued up to the value of £25,000. If a loan is required larger than a business loan, a commercial mortgage is the viable option that people and businesses turn to. So one kind of runs into the other, as the required loan amount increases.
Key Features of Commercial Mortgages:
- It’s often said that commercial mortgages tend to have no fixed interest rates. Whilst this can be the case, there are lenders who offer commercial mortgages with a fixed interest rate and HSBC is of them, so fear not. (More on fixed or variable rates below.)
- Versus a business loan, commercial mortgage interest rates are typically much lower.
- Versus a residential mortgage, interest rates can be higher. This is due to the fact that lenders see commercial property as being riskier than residential.
Fixed or Variable interest rates?
This is down to you, the lender doesn’t decide this, you do. What it normally comes down to is which would be cheaper?
[Bear in mind most mortgages only give you an option to fix rates for 2, 5 or sometimes 10 years.]
Which is cheaper – this isn’t always known, as interest rates from lenders are influenced by the Bank of England (B.O.E) who sets the base rate. It’s important to remember this base rate isn’t set in stone, it’s changeable. As it changes it typically affects the interest rates charged by commercial lenders.
What does this mean to you and your mortgage?
Well this then has the ability to change commercial mortgage interest rates, which means your monthly payments could do down or up.
To explain that further, if you had a fixed mortgage and the BOE base rate went either up or down it would have no bearing on your monthly mortgage payments, for as long as your ‘fixed term’ was in place.
Fixing the rate is then seen as less risky in terms of future financial planning. As having one fixed amount each month is, people find, easy to plan and forecast around.
What about if you had a variable mortgage rate and the BOE base rate when down?
Well then you’d typically find that the interest rate on your mortgage would go down to in sync. Thus making it cheaper to service that mortgage, with a cheaper monthly repayment. Sound good?
But what about if the BOE base rate went up?
Well, then your mortgage interest rate would likely go up too and so would your monthly mortgage repayments.
So which is better?
Well after explaining both fixed and variable interest rates you’d probably agree there isn’t a ‘better’. It comes down to your own requirements and appetite for risk.
What is the term for a commercial mortgage?
The ‘term’, for clarification, is just the amount of time you agree to make the repayments over. These terms are typically between 15-25 years but can be shorter than that and sometimes longer at 30 years.
Most lenders are flexible when it comes to the repayment term. It usually comes down to the person or business requiring the mortgage. For instance a longer mortgage term will usually mean smaller monthly payments. This is because the amount of money being repaid is split into more payments over that longer term so each payment is therefore less.
What’s the catch?
Well it’s not a catch but remember that due to the interest being charged on the mortgage, a longer term usually means that the total amount repayable will be greater than a shorter term mortgage.
This is because interest is typically applied on an annual basis and therefore the longer the repayment term the greater the total repayment figure is. In short because you’ll pay more in interest.
How do you get a commercial mortgage?
Typically all the high street lenders will ask for a few key things from you. (By high street lenders we mean, Barclays, HSBC etc) But most lenders will usually ask for the same things:
- 2-3 years audited accounts
- 2 months banks statements
- Asset and liabilities statement
What deposit is required for commercial mortgages?
Deposits for commercial mortgages are usually somewhere between 20-40%. So this is 20-40% of the assets value. So for example if the asset you wish to purchase is 1 million, with nearly all lenders you’d require a deposit of £200,000 – £400,000.
It is possible to obtain a mortgage with a smaller deposit but there is usually a bigger interest rate associated with it.
On the flip side of course what lender would say no to a larger deposit than 20%-40%, as it’s much less risk on their behalf. In doing so you’d be sure to secure a better interest rate, making it cheaper in the long run.
Commercial Mortgage Rates
Have you ever heard the term ‘above base’? The ‘base’ bit refers to the Bank of England ‘base’ rate, which we discussed early, and the ‘above’ part is, what percentage over that base, the interest rate is.
For example let’s say the bank of England base rate is 1%. Then a 2% ‘above base’ commercial mortgage interest rate would be 3% in total. That’s the bank of England ‘base rate’ plus the lender’s interest rate on top of that.
So to answer the question typical commercial mortgage rates are usually somewhere between 2-3% above base.
Can I get a 100% commercial mortgage?
Yes it is possible to obtain 100% commercial mortgages. These mortgages usually carry much greater interest rates and require some other form of security collateral, like say your home, another property or other asset.
Alternatives to a Commercial Mortgage
There aren’t many really, if you’re looking to borrow more than a lender will offer to you in the form of a business loan, then a commercial mortgage is the option for you.
There is another alternative though, a bridging loan. Only really to be considered if you require capital for a short period of time. Bridging loans, if you haven’t heard of them, do carry a higher interest rate than a commercial mortgage. But if you only require a commercial mortgage for a short period of time anyway, then you could incur early repayment charges on that mortgage. Could those charges equal the same cost as the (usually) higher interest rate of the bridging loan? It’s worth at least reviewing that option.
In plain English bridging loans are an option for short term capital, say if you wish to buy a property but haven’t first raised the required funds by selling another property. Or buying at auction where it’s very time sensitive, and you haven’t the time to go through a full application for a commercial mortgage. Or more commonly, they won’t lend on auction properties.
Best Commercial Mortgages
Lenders take each application on a case by case basis so it’s nearly impossible to say what you’d be offered to the absolute penny.
If you can provide all the necessary paperwork, have a fair/good credit score and then you should have nothing to worry about. After all, lenders want to know you can repay their money first and foremost, if you can demonstrate this clearly, you’re head and shoulders above the rest!