Commercial mortgage rates and criteria - Commercial Trust

Commercial mortgages for business and investment

A b2b commercial mortgage helps business owners and investors buy commercial property.

Commercial mortgage loans are different from buy to let and residential mortgages. They are far more complex to organise and lenders want a lot more information prior to making a mortgage offer.

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What is the lowest commercial mortgage interest rate?

At present they can be from a minimum of 2.5% above the Bank of England base rate per annum.

At most, commercial mortgage rates can exceed 9% per annum.

Use the commercial mortgage calculator to compare rates and repayments for a commercial property mortgage.

What should I expect from a commercial mortgage broker?

Investors using a broker to make a commercial mortgage application should expect:

  • A detailed level of research to find a suitable mortgage
  • Consider mortgage options from many lenders to find the best deal
  • This deal should be the best deal based on their needs and circumstances
  • That, wherever possible, the administrative tasks associated with completing the mortgage is done for them
  • Regular updates on the progression of the case are given, without prompting
  • That the mortgage completes within an efficient timeframe

What is involved with the commercial mortgage application process?

1. Adviser consultation: The broker will want to find out about the investor and the deal, including details of the premises and, if the property is to be occupied by the investor’s own company, details of that business.
An investor should tell the broker what they want the product they are looking for to do for them. There may be multiple requirements.

This process of gathering information from a client is called the ‘factfind’.

2. Sourcing the deal: This is where the advisor searches the marketplace to find a product which matches the information gathered during the factfind.

There are two areas of focus when sourcing a deal. The first is which lender(s) the deal ‘fits’ with, based on criteria. The second is, of the lenders the deal fits with, which one offers the most competitive interest rate.

There are many factors that can result in a deal falling inside or outside lender criteria, which is why it is essential to give accurate information during the factfind.

What makes commercial mortgage rates different to residential or buy to let, is that the difference between one lender’s rates and another can vary far more significantly. Commercial mortgage lender fees are also generally very similar.

This means that, the rate of repayment is a key factor on a commercial mortgage deal, where on other mortgage products, the overall cost will be very important.

3. Asset and liability form: An Asset and Liability form requires details of all income and expenditure for the mortgage applicant(s) and, if investing through a limited company, for the business too.

4. Decision in principle: (also known as an agreement in principle) is a pre-application, non-binding offer by a mortgage lender, to loan an amount of money.

Some lenders may undertake a “soft” credit search on the applicant at this stage. This search that will not appear on a credit report to any third parties, or affect the applicants credit rating, but will be visible to the applicant if they were to secure their own credit report.

5. Application: Once a decision in principle has been secured from the appropriate lender, a broker will contact the client to outline the deal.

At this point, the client will tell the broker whether to proceed with a full application.

It is standard procedure for all mortgage applications to include a credit check. At this stage this will be a “hard” search, visible to third parties and that may affect the applicant’s credit score.

6. Request for documents and information: At this point each lender will have a pack of information they require from the applicant(s). This list of documents varies from lender to lender.

It is easy to provide incorrect documents, or complete forms incorrectly, which can cause delays.

Where a service-led broker is involved, a commercial mortgage applicant should expect the support team working with them to supply the list of lender requirements. The mortgage broker team should check that the documents are the correct ones and that they are completed correctly.

If the documents were to be sent direct to the lender, the risk is that the lender’s turnaround time would hold up any discovery of there being any problems, so this intermediary function can be very useful.

7. Valuation: Commercial lenders may instruct the valuation before or after all documentation is received, if it is dependent on the documentation being received, then getting this done quickly will avoid delays to the ongoing process.

8. File review: The lender will review all documentation and the valuation as a whole. Further requirements for information may arise that need to be provided by the applicant(s).

9. Mortgage offer: Once all residual requests for information have been satisfied, the lender will issue the commercial mortgage offer. This will be provided to the client and (if applicable) the broker. Some lenders will issue this by post, some by email. Sometimes the broker will receive the offer first, because it will go by email to the broker but by post to the client.

10. Solicitors are instructed: The mortgage lender will instruct their solicitor to start work at this point. They will, in turn, contact the client’s solicitor.

Enquiries and searches (if the application is a remortgage) are undertaken by the solicitors.

The work of solicitors is vital to the timely progression of the mortgage application. Anyone looking to secure a commercial mortgage should ensure that the solicitor they appoint is experienced in commercial property conveyancing.

If not, it is easy for mistakes and misunderstandings to occur, as a result of the solicitor being on unfamiliar territory. This can cause delays and unnecessary problems.

11. Mortgage contract issued: The mortgage lender will issue the mortgage contract to the client’s solicitor, who will check it, before the client signs it.

12. Funds released: After final checks are completed and everything and everyone is ready to do so, the lender’s solicitors will request fund from the lender.

When the lender releases the funds they are paid into the lender’s solicitor’s bank account, then the client’s solicitor’s bank account and lastly into the seller’s solicitors bank account.

The case is now completed. Where a broker is involved, the client should expect the broker to confirm this, they may also receive notification from their lender.

How is a commercial mortgage enquiry assessed?

There are key factors a broker will look at when assessing the viability of a commercial mortgage enquiry.

  1. Deposit - What percentage of the property value does the applicant have as a deposit?
  2. Owner occupied/investment – Is the property going to be let to commercial tenant, or will the building be used (in whole or in part) to operate the applicant’s own business from?
  3. Experience - Does the applicant have experience in renting out property and/or the sector the building will be used for (if they will be operating their own business from it)
  4. Residential ownership - Does the applicant own their own home?
  5. Net profits – Where a building will be owner-occupied, the net profits of the business are essential

Commercial and semi-commercial property types

Below are examples of properties that you might use a commercial mortgage to buy:

Commercial property Semi-commercial property
Warehouse Flat above shop
Office Multiple rental properties and business on one plot
Shop Residential home and business on same plot
Restaurant Terrace with houses and business premises
Garage
Leisure centre
Hotel

How much do you need for a commercial mortgage deposit?

Commercial property lending carries more risk than for a residential rental property. For this reason, commercial lenders require a deposit to be a minimum of 25%.

Commonly a deposit on a commercial mortgage would be a bit more than the minimum. So, most prospective commercial mortgage applicants might expect to put down a deposit of 30%.

There are various ways to raise a deposit:

  • Refinance/put a second charge on other property (commercial, buy to lets, residential home)
  • Sell stocks and shares
  • Savings
  • Pension lump sum
  • Sell other assets

The type of commercial premises being invested in will also affect the amount of deposit required. Some property types are higher risk to lenders than others. Where this is the case, a bigger deposit mitigates the risk of lending.

Is experience required to secure a commercial mortgage?

For investors yes, experience as a landlord will impact the loan amount a lender will offer.

The loan to value (the proportion of the property value that can be borrowed from a lender) is affected by the investor’s experience as a landlord.

If the landlord is buying a commercial property that they will be operating their own business from, their experience of working in that sector of industry will also affect the loan to value they can achieve.

It is possible to secure a commercial mortgage on a building intended for occupation by a start-up business.

Some industries will only achieve a low loan to value, say 50%, where others will go up to 60%-75%.

Can I borrow 100% loan to value on a commercial mortgage?

The ability to borrow 100% of the value of a commercial property in the absence of other security is limited.

One exceptional circumstance is the healthcare sector. A dentist or a doctor wishing to invest in a building for their surgery can borrow up to 100% of the property value.

There are other ways to achieve 100% borrowing on a commercial property, for other investors.

This would require using another property as security, for instance an investors residential home, and borrowing against it (this may involve a ‘second charge’ on the property, rather than amending any existing residential mortgage); as well as taking out a commercial mortgage.

So, whilst 100% LTV commercial mortgages are restricted to doctors and dentists, there are ways to raise the full borrowing for a commercial property.

What loan to value can I get on a commercial mortgage?

The loan to value on a commercial mortgage is affected by the industry the security property will be used for. This is because the risk of lending associated with different industries varies.

Commercial mortgage lenders may also look for the applicant to have experience in the industry the property is for, unless it is being rented out to third parties and is an investment-only property.

Industry/security

LTV

Healthcare

Up to 100% LTV

Construction

Up to 75% LTV

Agricultural

Up to 75% LTV

Land

Up to 50% LTV

Hair and beauty

Up to 75% LTV

Convenience stores

Up to 75% LTV

Public houses

Up to 50% LTV

Restaurants

Up to 70% LTV

Hotel and leisure

Up to 60% LTV

What is the minimum term for a commercial mortgage?

The minimum term for a commercial mortgage is 6 years. This is the shortest amount of time over which you can take out a commercial mortgage.

What is the maximum term for a commercial mortgage?

The maximum term for a commercial mortgage is 25 years. It is possible to refinance at the end of a mortgage term to another product or lender.

Why invest in commercial property?

You may buy a commercial property to operate your business from, or, to rent it out to (an)other business(es).

Owner occupier: Over time a commercial property may achieve capital growth (irrespective of your business performance).

Commercial mortgage payments may compare favourably against rent you might otherwise pay.

The property is yours to do with as you wish (although bound by planning permission). Extend, alter, reconfigure, it may all be possible.

Investment only: Commercial property lease structures favour investors. A residential lease may be 6-months, where a commercial lease is much longer.

Commercial leases average at around 8 years. This can mean a steady source of income, assuming the tenants are financially robust.

A commercial property is typically larger than a residential let. The rent charged on a commercial property can therefore be higher.