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What is a Commercial Mortgage?

A commercial mortgage is similar in principle to a residential mortgage except that it is used to purchase real estate or raise capital for commercial purposes rather than for domestic purposes. As with residential mortgages, the lender

reserves the rights to the real estate until the loan is repaid in full.

What would you use a commercial mortgage for?

Types of properties people can buy using advertising

The mortgage can be anything, from hotels, restaurants, shops, etc

take to office buildings, factories, warehouses and farms.

Sometimes people can buy a business and an asset at the same time

if the two are intrinsically linked, such as a hotel or restaurant.

When real estate is purchased for use as business premises,

The mortgage is known as a commercial owner-occupant mortgage.

Alternatively, a commercial mortgage can be used to refinance.

People may want to release capital from their existing business

property to extend or improve its premises or facilities, or to raise

cash for any other business purpose.

There are many other uses for a commercial mortgage, such as buy-to-let

mortgages, where people buy real estate (perhaps residential) as

investments and rentals, or mortgages for commercial development, where

people buy real estate to develop it and resell it for profit.

Why buy space and not rent?

Taking out a commercial mortgage is a big step for your business and

must be carefully considered before making a commitment.

However, it can be a great investment and business to own

the spaces you occupy can bring many advantages to your business:

In most cases, income from the loan is not taken into account

be taxable income, and interest payments are tax deductible.

You will have a clear repayment plan with customized terms and rates

to suit your needs. (See below for more details on this.) That means

that you can manage your cash flows more easily.

Paying off the mortgage can be cheaper than the rent.

Every real estate purchase is an investment. Your property could

you appreciate a lot of value, thus increasing your capital.

You have the potential to make money by subletting. For example,

you may have space in your property that you don’t currently need,

and could make money on it by giving it to another business until

you need it to expand your own business.

Why use a commercial mortgage to raise capital?

If you already own a commercial property and need cash for your business

for any reason, unlocking the equity in your property by refinancing

or remortgaging is an effective solution. Think of it as a loan that

can be used for any business purpose – not just for expansion or

improving your premises. There are many advantages to this:

Commercial mortgages can be obtained more easily than business loans,

especially for small businesses, since real estate provides security

lender.

Unlike many business loans, which tend to have short repayments

term, commercial mortgages cover a long period – everything from 15 to 25

years, depending on the lender and your financial circumstances

business.

In most cases, income from the loan is not taken into account

be taxable income, and interest payments are tax deductible.

There are two ways you can use a commercial mortgage

raise capital for your business:

1. Refinance your current commercial mortgage to include a loan

the amount you want to borrow.

2. Release the equity that has accumulated in your current property,

i.e. the current value of the property minus any outstanding mortgages

or debts related to it.

What are the costs and repayment options for commercial mortgages?

Repayment plans are usually similar to home mortgages. The main options are either fixed rate or variable rate mortgages or interest only mortgages/documentary mortgages.

However, unlike residential mortgages, interest rates for

commercial mortgages tend to be higher as perceived business lending

as a greater risk. Prices will vary depending on circumstances

of your business, but generally speaking, the higher the risk, the

higher interest rate. For the same reason, repayment terms also tend to

be shorter than residential mortgages – usually 15-20 years.

You will probably also need to put up a deposit, like most lenders

will not give 100% of the mortgage in relation to the value of the loan – i.e. will not provide

mortgage for the entire amount of the purchase and expects a down payment

from you as a form of insurance (usually 20-30% of the purchase price,

although some lenders accept only 5% but with higher

interest rate for repayment).

Other costs to consider are the setup costs involved in organizing a

commercial mortgage, such as legal fees, surveys and brokerage fees.

As for being responsible for paying off the mortgage, that depends on

type of work. If you are a sole trader, the responsibility will be

lie with you and you may also be personally liable if you fail to fulfill your obligations

on repayments – which means you could also lose personal property

as a business premises that is under mortgage. If you are in

partnership, liability and responsibility apply to all partners. If

it is a limited liability company, liability and responsibility belong

business, although personal insurance may be required for approval

mortgage depending on the profitability of the business.

How to get a commercial mortgage?

When applying for a commercial mortgage, you’ll need to do your part

do your homework and build a strong business case to showcase your company

ability to repay the mortgage. Be prepared to undergo a thorough examination

an examination of your finances, including:

business history of your company: financial statements, profit

and loss accounts, balance sheets, past and current cash flow, everything

certified by an accountant

future projections for your company: long-term business plan,

real estate purpose, earning potential, projected cash flow

personal finance: the financial history of you and everyone else

other key stakeholders in the business, such as creditworthiness and

past earnings

All of these factors will determine the creditor’s perceived grade

risk in borrowing money, which in turn will determine the term

and the interest rate of the loan they are willing to give you.

An obvious first step for many people applying for an ad

mortgage is to approach their bank or business lender, with which they are

they already have an established relationship. However, precisely for this reason

you are unlikely to get a competitive job.

The best way to get a commercial mortgage is to use the services of a

specialist independent mortgage broker, who can help you get a good one

a package that fits your needs regardless of your circumstances. Even if yours

bad credit doesn’t mean you won’t qualify for a

commercial mortgage. Having a broker to represent you really will

strengthen your case. They have access to a wide range of lenders and

understand their lending criteria as well as your specific needs.

Therefore, they can undertake a targeted search, increasing your chances

finding a suitable loan. In fact, the broker might even

get several different options from various interested lenders, who

provides room to negotiate a fantastic deal for you.

Money is not all you will save. Imagine you tried to log in to

several lenders yourself – think about the time it takes to complete them all

applications and time wasted applying to unsuitable lenders.

Independent advice and expertise offered by the broker

are invaluable.

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