What Can I Use a Commercial Mortgage For?

Rent costs can be cripplingly high for businesses – and a commercial mortgage can be more affordable, as well as providing a tangible asset for your balance sheet.

Like a residential mortgage, you can use a commercial mortgage to purchase any land or property for business purposes, with the loan secured against the asset.

However, commercial mortgages are also available for property development, expansion, remortgaging, or consolidating business debts, so multiple applications may prove beneficial.

Today our mortgage brokers team explains a little more about the flexibility of commercial mortgages and the advantages to business applicants.

Arranging a UK Commercial Mortgage

Commercial mortgages are usually available up to much higher values than a residential loan and can be used to:

  • Buy a business premise to trade from.
  • Purchase land development projects.
  • Buy out another business.
  • Invest in a rental property or asset.

Most commercial mortgages have a long term, often up to 25 years, but sometimes running for as long as 40.

Lenders tend to offer up to about 70% of the property value as a maximum. However, deposits vary from 25% up to 40% depending on the associated risk and the purpose of the commercial mortgage.

The Benefits of a Commercial Mortgage

As well as a way to buy a trading premise, commercial mortgages can be an advantageous way to finance a business and provide more than a place to work from.

Owning property itself is more secure since it means you can manage your mortgage costs without being exposed to rising rent and leverage the asset to release equity in the future when you need a cash flow injection.

Of the many benefits to a commercial mortgage, some of the most enticing include:

  • Options to release capital for further business investments.
  • Using the mortgage to consolidate high-interest debts.
  • Releasing cash to purchase new equipment.
  • Expanding trading through reduced property expenses.
  • The potential to sublet parts of the property to generate additional earnings.

Business owners can use commercial mortgages to buy premises to trade from, rent out, purchase a trading enterprise, or release equity in existing property assets.

Applying For a Commercial Mortgage

There are thousands of commercial mortgage lenders out there, so the best option is undoubtedly to work with an independent, whole-of-market broker such as Revolution.

Lenders all have different rules and policies, so some will only lend to businesses with a minimum number of years of trading. Others specialise in funding land developments or might prefer only to offer owner-occupier mortgages.

The application process involves financial checks, so you’ll normally need to provide:

  • Accounts and tax returns for the past three years.
  • Current management accounts and projections.
  • Bank statements and statements of your assets and liabilities.
  • Details of the business owners and directors.

Credit checks also apply, so a commercial mortgage lender will also investigate any adverse credit issues.

Rates and Repayment Options on a Commercial Mortgage

Most commercial mortgages carry higher interest rates than a resident loan, and deposits often start at around 30%, given that this type of lending is perceived as a higher risk.

Interest only commercial mortgage rates depend very much on the type of mortgage you take out – a fixed-rate mortgage will have a static interest rate for the agreed period. Most fixed deals run for up to around five years.

Tracker mortgages and those based on variable interest rates are set against the base rate, so these will go up and down as the Bank of England adjusts for factors like inflation.

Loan terms on commercial mortgages can be as short as five years and up to 40, so your lender will want to look into forecast trading figures as well as past financial performance.

Commercial Mortgages for Start-up Ventures

Finding financing as a brand new business is always a little trickier since you won’t have any trading history or figures to demonstrate the company’s viability.

Many lenders in the mainstream market won’t lend to businesses without two to three years of experience, but specialist lenders are happy to consider start-up applicants.

There are many solutions, such as offering security against an existing property, which could be a residential home if the business is new and doesn’t have any assets.

Lenders are usually open to these sorts of agreements, given the acknowledgement that a new company won’t yet have a trading history – but they’ll need some kind of security to offset the risk.

Please note that putting up personal assets as collateral is accepted but can mean exposing your private assets to risk if the business fails and the mortgage ends up in a repossession scenario.

For more information about the potential uses of a commercial mortgage or to compare the best deals on the market, please get in touch with Revolution at info@revolutionbrokers.co.uk or give us a call on 0330 304 3040.