The basics of Commercial Premises Mortgages

Renting a Commercial Property is a fairly safe option for small businesses but does mean your working capital is spent on rent with no return. Could it be better to invest in a commercial property instead? If you’re ready to commit to premises in the long-term, buying may be the better option, in which case, you’re likely to need a Commercial Mortgage.

What is a Commercial Mortgage?

Commercial mortgages are loans allocated specifically for buying or refinancing any land or property for business purposes, like a residential mortgage money is borrowed and secured against a property – in this case it will be the shop, warehouse, office or land that you’re going to buy.

A commercial mortgage can also be used to expand an existing business, or for residential or commercial property development. In general, a commercial mortgage, unlike a residential mortgage, extends finance in four very distinct ways depending on your business model. It allows you to buy business premises, to secure land for development ventures, to develop an owner-occupied business or to add to your buy-to-let portfolio. Different lenders will specialise in different industries, for example some companies only lend on Pubs and Restaurants, and others specialise in Retail. Finding a specialist commercial mortgage lender may help you find more competitive rates, better advice and a smoother transaction.

What costs are involved in Commercial Mortgages?

Commercial mortgages are usually lent over a period of up to 25 years just like residential mortgages. Commercial lenders will typically lend up to 70% of the property's value, although some lenders may offer up to 90% depending on your circumstances. So if you’re considering purchasing a commercial property, you’ll need to ensure you can find up to 30% of the property value as a deposit, in addition to funding the monthly mortgage repayments from your cash-flow. You may also need to pay broker fees or arrangement fees, and of course your legal fees.

Commercial Mortgage rates can vary with the Bank of England base rate, just like residential mortgages. You may find rates as low as 1%; again, this will depend on your circumstances and how much “risk” your business poses to the lender.

The long-term benefits of a Commercial Mortgage

A commercial mortgage can do a lot more than just provide a base for your business, they are increasingly viewed as a source of business funding. In owning your own business premises, you reduce the risk of being exposed to any increase in rental charges. Commercial mortgages can also help future-proof your business by allowing it to access equity as the property price increases over time, and if needed, you can re-mortgage the commercial property later down the line to fund further business growth. Alternatively, you may choose to sell your business premises at a profit if the market allows or rent it out if you choose to move.

Applying for a Commercial Mortgage: What You Need to Know

Some lenders offer mortgages only when there is plenty of asset security available, while others prefer to lend to owner-businesses or will only fund land developments. As with any mortgage, any potential borrower is going to be subject to certain financial checks. These usually extend to: three years of accounts (or tax returns), current and projected performance figures (cash-flow forecast), bank statements, details and profiles of all directors and partners of the business, asset and liability statements.

Commercial Mortgages for Start-Ups

If you’re looking to buy premises for your start-up business without any trading history you’re likely to be offered a much lower Loan to Value ratio and as a Director, you may be asked to secure the mortgage on your own home if possible. Speak to a qualified financial adviser specialising in business finance before you decide about whether it’s best to rent or buy.

We have a fantastic portfolio of commercial property to rent or buy in Sussex. If you would like to view any of our properties and discuss the potential for your business, please contact our Commercial Team on 01273 688882.