Buying or remortgaging a commercial property?

Commercial mortgages (also known as business mortgages) are a form of mortgage offered to business owners who want to raise funds secured against a property for business purposes – for example a buy-to-let property or an office. They work in a similar way to residential mortgages in that you borrow money that is secured against the property itself, offering an ideal solution if you are looking to expand your business or investment property portfolio.

There are two main types of commercial mortgage, each designed for differing business needs.

The first is an owner-occupier mortgage, a form of mortgage that a business owner may use to purchase a commercial property for their own business use. With commercial rental being notoriously high, this type of mortgage allows business owners to keep costs down while putting funds towards ownership of the property.

A commercial investment mortgage, more commonly known as a buy-to-let mortgage, is used to buy a property that you plan to rent out to tenants.

Swoop’s team of experts can assess whether you’ll qualify for a commercial mortgage – and ensure you’re matched with the right lender – as different lenders have different levels of eligibility. Your business will be analysed against a number of criteria to decide how much risk there is in lending you the money you need, for example:

• Whether you can afford the initial deposit (which can be up to 40% of the mortgage loan)
• The financial health of your company, with particular attention to your debts and cash flow
• The expected future income of your business
• Any income you stand to make from renting out the property if it's a commercial investment mortgage
• Any assets or credit you have access to

If you satisfy the lender’s criteria, they will be able to offer you a mortgage.

When applying for a commercial mortgage, you will need to provide a number of documents in order to satisfy the lender that you will be able to pay off your mortgage as per the terms of the loan.

Your application for any commercial mortgage will not be successful if you are unable to provide the following:

• Business finance summary – details of your company’s finances such as income, expenditure, assets held and liabilities owed. The lender will need to know this information in order to work out the cash flow and net worth of your business if applying for an owner-occupied mortgage.

• Personal bank statements – depending on the lender, you will need to provide between three and six months’ worth of bank statements so that the lender can get a good idea of your personal financial position. Using Open Banking technology Swoop offers the ability to integrate your bank account to provide instant sharing of financial data.

You will also need to provide additional documents depending on the type of commercial mortgage you require. For an owner-occupier commercial mortgage, you will need to supply:

• Trading accounts – the lender will need to see your trading accounts in order to calculate your ability to afford the loan, as these give a better indication of the company’s financial health than simply viewing the bottom line.

• Six months’ business bank statements – you will probably be asked to provide business bank statements, so that the lender can see what the business’s cash flow is like from month to month. Using Open Banking technology Swoop offers the ability to integrate your bank account providing easy access to this financial data.

• Details of expected financial changes – if you are aware of any issues that are likely to change the company’s financial position in the future – for example increased income due to business expansion or a reduction in costs due to improved business efficiency – the lender will need to be informed.

Your lender is also likely to require additional documents if you are applying for a commercial investment mortgage, such as:

• Tenancy details – if you are buying a property to rent it out, the details of this planned tenancy will be required. This may include the tenant’s details, the expected monthly income from renting the property, and a full copy of the lease.

• Details of any other investment properties – your lender is likely to require details of any additional investment properties you own, such as the address, property value, monthly rental income, lease length, amount still owed and monthly mortgage repayments.

The amount you will need to raise as a deposit for a commercial mortgage depends on the lender, but it is usually somewhere between 20% and 40% of the cost of the property depending on a range of factors including, but not limited to:

• Your personal and business credit history
• Type of property you wish to buy
• Level of experience in the industry
• Affordability of the repayments based on your business accounts

The size of your deposit is usually negotiable, and you can even get a commercial mortgage without a deposit (a 100% loan-to-value ratio) if you are able to provide additional security such as assets or other properties. While the lack of a deposit may be an attractive proposition, you should be aware that defaulting on the mortgage could see the property used as security repossessed.

The terms of a commercial mortgage can vary greatly depending on the circumstances. They can run for as long as 30 years or as little as three years (any loan with a repayment period of less than three years is considered a commercial bridging loan). The length of the term does not usually affect the rate of interest you must pay, which is usually 3-4% but can vary from 2.5% to 6% depending on whether a specialist commercial mortgage is required, and what percentage of the value of the property you wish to borrow.

As with a standard residential mortgage, both fixed and variable rates are available – a fixed rate means the interest you pay is static for a certain period, whereas a variable rate will see the interest you pay fluctuate depending on the state of the national economy. The security offered by a fixed interest rate, which means your repayments will always be the same for the agreed period, means they are slightly more expensive on average than a variable interest rate.

Lenders will often agree a period where interest only repayments are made, deferring capital repayment for a term. This can aid with business cash flow.

Most lenders will allow you to pay your mortgage off early, but they usually charge an early repayment fee. Weighing up the pros and cons of paying off your mortgage early can be tricky; the lower your outstanding mortgage, the less you will have to pay in interest – but that could be offset by a high early repayment fee.

Some lenders place a yearly limit on how much you can overpay, with repayment fees only coming into play if you exceed this limit.