A commercial mortgage is any loan secured on a property which is not your house.
A commercial mortgage is a mortgage loan secured by commercial property, such as:
To acquire, refinance, or redevelop a commercial property, they use the proceeds from a commercial mortgage.
When are commercial mortgages used?
Commercial mortgages are structured to meet the needs of the borrower and the lender. Key terms include:
Commercial mortgages are generally subject to extensive underwriting and due diligence prior to closing. The lender's underwriting process may include:
Providers of commercial mortgages
Banks, large and small, are traditional providers of commercial mortgages.
Mortgage brokers do not provide commercial mortgage loans, but are often used to obtain multiple quotes from different potential lenders and to manage the financing process.
What forms of security can I offer?
Generally, lenders take the property you are buying as the only security for the loan. This is typically 70% of the value of the property, and ask for a cash deposit for the balance of the purchase price.
You can offer the lender additional security if you do not have the cash. This could be:
Can I get a mortgage on a leasehold property?
If the lease remaining is more than 70 years, then yes. Otherwise, you will need additional security.
What is the term duration for commercial mortgages?
Are all commercial mortgages variable rate?
Most are. A rate will be quoted as X% over base, and this in residential terms would be called a tracker mortgage.
Fixed rate mortgages under the value of £5000,000 are available. The lender takes the rate risk themselves. Mortgages, where the lender passes the risk on to the borrower by using a "Swap" contract, are best avoided. These complex derivatives are not suited to SME borrowers.
Why can I not find a definite rate?
The rates charged for commercial mortgages and business loans are not pre-determined like in the case of personal loans.
When applying for a commercial mortgage, a lending manager looks at it to assess the risk level. The decision requires a great deal of information. The lending manager will vary the rate offered to take account the risk level of the loan. Larger loans with a low-risk level will get the best rates. Lenders work from a risk profile and refuses loans that fall outside their risk profile.
How much can I borrow?
Arrangement fees are usually added to the loan when it completes. Some lenders may charge a commitment fee (1% - 2% of the loan amount for loans up to £1 million) to cover work carried out, and in case you do not accept their offer.
A commitment fee is payable with your formal application and is non-refundable. Smaller loans are subject to higher rates.
Commercial properties are far more variable than residential ones. The property requires a visit from a valuer who then writes and sends a 20-30 page report to the lender.
A valuer do not usually visit residential properties. This is why residential properties are cheaper than commercial properties. Valuation fees start at around £500. This is payable to the lender upon acceptance of an initial indicative offer.
You will be liable for your own legal fees and those of the lender. Legal fees start at around £500 per party. If both parties use representation from different partners from the same firm, it saves time, and therefore money.
Using a broker
It makes sense to use a specialist commercial broker who has the contacts and market knowledge to get you the best deal.
There has never been a more important time for businesses to understand the financial challenges facing them today. It is important to address them through a relationship with the correct financing partner that does not offer a limited range of “vanilla” financing products, but one that has the human resources to understand your issues, and the expertise to provide a complete solution.
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