Everything you need to know about commercial mortgages

Commercial mortgages are also referred to as ‘business mortgages’ taken out by business owners who want to purchase a property for commercial use. Businesses may consider buying their own building or lot to avoid increasing rents as well as management and maintenance fees.

There are also other special types of commercial mortgages like buy to let mortgages that you purchase with the intent of renting it out for profit. Business refurbishments and property improvement can also be covered by commercial mortgages.

In this article, let’s talk about what a commercial mortgage is and whether or not it’s the best option for your business.

How to get a commercial mortgage

Unlike residential mortgages which are typically ‘off the shelf products’, commercial mortgage criteria can widely vary from lender to lender since they are generally tailored solutions to help businesses achieve their goals. Whether you’re a sole trader, a limited company, LLP, trust, or partnership, there’s a wide range of lenders  and options in the market, but of course, there are qualifications involved:

How to qualify for commercial mortgage

To qualify, there are six main things that lenders look into:

• Business and personal credit history
• Background and experience of the borrower and the core people involved in the business
• Type of property you want to buy
• The proposed LTV or loan-to-value
• Your ability to afford the repayments
• Sustainability of the income source to cover the full duration of the loan

Swoop’s team can help you assess whether or not you qualify for a commercial mortgage. We will match you with the right lender that best fits your goals and circumstances.

Documentations required for commercial mortgage

The following are the main documents you need to prepare to submit a commercial mortgage application:

• Business finance summary- shows your company’s income and expenses as well as all assets and liabilities. This way, the lender can assess your actual cash flow and net worth.
• Personal bank statements– provide 3-6 months’ worth of bank statements to demonstrate your personal financial situation. Swoop uses open banking technology to enable instant financial data sharing.
• Trading accounts- This is required to further assess your ability to afford the mortgage and evaluate your company’s overall financial health
• Details about any expected financial changes– if you’re expecting more income due to business expansion or expense reduction due to new technology or equipment, it’s best to have them all laid out

There could be other documents you need to prepare depending on the lender’s exact requirements. If you’re looking to secure the mortgage to rent the property out, you need to provide the tenancy details you planned out including the expected monthly income and a full copy of the lease.

How much is the deposit for commercial mortgages?

The size of your deposit varies depending on the lender, but it’s typically somewhere from 20% to 40% of the property cost. You are free to try negotiating the amount. In fact, some commercial mortgages go without a deposit (100% loan-to-value ratio) if you can show enough security in the form of assets or properties. However, take note that if you default on the mortgage, the assets or properties used as security will be repossessed.

What is the amortisation period of commercial mortgages?

The terms can be as little as 3 years or as long as 30 years. The amortisation period won’t affect the interest rate, but you’re typically free to choose between fixed and variable interest rates.

What are the interest rates for commercial mortgages?

The interest rate depends on the perceived risk determined by the lender. Those applications that are perceived to be high-risk may go 3-5% above base rate. Other factors include the ability of the business to afford the repayments or whether or not the business has sustainable sources of income for the loan.

In general, commercial mortgages are seen as more high-risk than residential loans, which leads to higher interest rates. However, commercial mortgages have better interest rates than traditional loans since the money is borrowed against the property in case the borrower defaults on the loan.

To get the best interest rates, the key is to display a strong financial profile and take your time shopping around for lenders. Swoop can help you get matched to discover the most competitive rates in the market.

Is it okay to pay off a commercial mortgage early?

Yes, you can. However, some lenders may charge an early repayment fee or some place a limit on how much you can overpay per year.

Pros and cons of commercial mortgages

If you’re still on the fence about applying for commercial mortgage, check the pros and cons below to make an informed decision

Pros

• Easy access to capital– Whether you want to buy a commercial property for expansion or investment, commercial mortgages are a great way to access capital.
• Secure property ownership– With rental rates increasing, securing your own property can mean more stability, not to mention long-term value appreciation.
• Enjoy tax benefits– Property-related expenses and interest payments are tax-deductible
• Flexible funding options– there are a lot of commercial mortgages available and you can easily compare your options using sites like Swoop.
• Build equity– grow the value of your assets and build equity to leverage for future financing or reinvestments.

Cons

• High interest rates– commercial mortgages have higher interest rates than residential
• Strict qualification criteria– lenders perform thorough business financial evaluation before approving commercial mortgages and the down payments may also be larger

• Market volatility and other risks– commercial properties are subject to economic conditions, market fluctuations, or sector-related risks
• Prepayment penalties- some lenders may charge early repayment fees

Is commercial mortgage the right choice for your business?

Commercial mortgages actually offer lower interest rates than other types of financing. Also, if things change along the way– like you need to move to a bigger space or close your business, you can still manage the monthly payments by either renting out or selling the property.

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