Acquistions advisory

What Is a Commercial Mortgage?

A commercial mortgage is a type of mortgage or loan that’s secured on a commercial property that isn’t your place of residence.

You can use a commercial mortgage to buy an existing property or a new build. Or you might want to buy an entire business, not just the property itself.

 Because most commercial mortgages typically only offer up to 70% of the total value of the property, the lender relies on the business to fund the balance to complete the purchase. This is often a substantial amount and can significantly increase the ‘own funds’ required to complete a business purchase involving a property.

  • Mortgage term
The loan term can vary from 5 to 40 years. It’s a big financial commitment, so you need to understand what you want from your commercial mortgage and what your mortgage lender wants from you.
  • Repayment
Interest rates are typically higher than with residential mortgages, as the lending is seen to be higher risk. Typically, you will need to find a deposit of at least 30%.
  • Credit history
Your credit history and the credit history of any business you wish to purchase will play a big part in whether your application is accepted. However, it isn't always the single focus that is considered; you will also need to provide a comprehensive picture of your company including projections and a business plan.
  • Stamp duty
A land tax that is payable on all properties and the rate varies, but for a £500,000 property the amount you currently pay is £20,000.
  • Interest rates
Variable rates are set against the Bank of England base rates and will vary depending on the set rate at the time. Fixed rates can be set for a specified period (up to 5 years) offering level repayments which can be calculated into business projections.
  • Fees
As with a residential mortgage, you should expect to pay a conveyancing (legal) fee, arrangement fee, a valuation fee, and an administration charge.
  • Tax
The interest repayments on your commercial mortgage are tax-deductible.
  • Refinancing
If your target business already owns, or has a modest mortgage on its premises, re-mortgaging it can allow you to release cash with which to fund your purchase

Pros

  • If you want to borrow to invest in your own business, or purchase another, commercial mortgages will usually provide a loan over a longer period and with lower interest rates than standard business loans.
  • The interest on a commercial mortgage is tax-deductible.
  • Over time you will save on rent payments and as your commercial property rises in value then you could be sitting on a nest egg.

Cons

  • Commercial mortgages can be complex, and you need to be sure you take out the right type of mortgage to meet your needs.
  • As the mortgage is secured against your property, you may be putting it at risk if something goes wrong.
  • You might be able to afford the repayments when business is booming, but make sure you can pay them during the lean times too.
  • Lenders can expect quite large deposits, so you could be taking quite a lot of money out of the business to get on the commercial property ladder.