Commercial mortgages are a type of mortgage that is used to purchase or refinance commercial property. A commercial mortgage can be used to fund a property that is to be used as the owner’s business premises, or an investment property.
In this guide, we’ll deep dive into commercial mortgages, breaking down what they are, how they work, where you can get one and how to get the best deal.
What is a commercial mortgage?
A commercial mortgage is a type of mortgage that is secured against a commercial property, properties or land. Commercial mortgages allow business owners and property investors to finance properties that would be unacceptable to residential mortgage and buy to let mortgage lenders.
Commercial mortgages are a popular product and according to ABC Finance, the commercial mortgage market hit £36 billion in 2020 and looks set to grow further. This growth is fuelled by both business owners and property investors who are keen to secure commercial property.
How do commercial mortgages work?
Commercial mortgages work in much the same way as residential mortgages. The borrower takes out a mortgage and their commercial property is taken as security, by way of a legal charge.
Once set-up, the mortgage is usually repaid through regular monthly repayments – although some lenders will allow quarterly, or even flexible payment schedules. Flexible payment schedules are more common for seasonal businesses, who have very strong and very weak months, or unpredictable trading.
Commercial mortgages can be taken on a capital repayment or interest only basis. Capital repayment is the more common option for owner-occupied applications, and those taken through high street banks. Challenger banks tend to be more flexible and may be more relaxed about offering interest only loans.
As is the case with residential mortgages, commercial property mortgages can come with either fixed or variable interest rates. Fixed rates give you certainty that your payments won’t change for the duration of the fixed rate period. Variable rates can increase or decrease in line with changes in the wider market.
Fixed rates are best for those who want the security that their monthly repayments will remain the same. Variable rate products tend to be best for those who simply want the lowest interest rate currently and are willing to accept the risk of future interest rate rises.
Where to get a commercial mortgage
When applying for a commercial mortgage, there are two major options. Applying through a broker, or approaching lenders direct.
Here we will break down the key advantages and disadvantages of each.
Using a commercial mortgage broker gives you an added layer of support, as they’ll work with you throughout the application process. Their job is to make sure you get the best deal and to ensure the process runs smoothly for you.
Of course, not all brokers were created equal, so before committing to a broker, check their reviews to make sure you’re working with a reputable one.
On top of a broker’s reviews, it’s also important that you check their fee structure before making an application. Many mortgage brokers charge significant fees for their service, up to 1.5% of your loan amount – £4,500 on a £300,000 mortgage!
While this may sound expensive, it must be considered alongside the savings you can make if they’re able to find you a better deal than you can get when working directly with a lender. In addition, there are some excellent brokers out there who don’t charge their clients a fee – so finding a fee-free broker can result in big savings!
Always shop around and look to get multiple quotes, rather than settling on the first mortgage offered. You can either do this by speaking to multiple lenders, or by using 1 or 2 brokers to test the market.
The second method of finding a commercial mortgage is to approach lenders directly. The big benefit of this approach is that you’ll save money on broker fees (if your broker charges them).
That said, speaking to each lender to get a quote can be very time-consuming, especially as many will want to see accounts and bank statements before quoting. As such, while there is money to be saved, it can be time-consuming to do so. On top of that, some lenders, such as Interbay, Allica Bank and Shawbrook Bank only work through brokers and can’t be approached directly, meaning you’ll miss out on some deals if you choose to go direct.
Be the first to comment