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How does a commercial mortgage work?

Commercial mortgages are secured on the commercial unit being purchased or refinanced.

The commercial loan is usually paid back on a capital repayment basis, but interest-only is possible with some providers.

Many commercial mortgage products are variable rate, but fixed-rate deals are available. Due to the higher risk for the lender, commercial investment mortgage rates are generally more expensive than for owner-occupied mortgages.

Personal guarantees and debentures

A Personal Guarantee (PG) is often required from company directors.

For purchases through Limited companies or Limited Liability Partnerships, the loan may be secured by way of a debenture with a fixed or floating charge registered at Companies House.

Semi-commercial property is seen as less risky

Note also that semi-commercial or mixed-use properties (shops with flats above them, for example) are seen as less risky for a couple of reasons.

First, it's easier to find tenants for residential property than it is for commercial. Second, with both residential and commercial income streams, there's less chance of a completely void period.

Valuing commercial property

The lender will instruct a commercial property surveyor to carry out a valuation of the security property.

Unlike a residential valuation, a commercial surveyor may produce a trading business valuation as well as the bricks-and-mortar value.

The surveyor assesses numerous factors including:

• the rent amount and yield
• the ground rent and service charge if purchasing a leasehold property
• the number of years remaining on the lease (if a leasehold property). The lender will specify a minimum lease duration at the point of commercial mortgage application and at the end of the mortgage term.
• whether the Class of Use is appropriate. If planning permission for Change of Use is being applied for with the local authority, this will need to be approved before the mortgage can be offered.
• recently sold prices of other similar commercial properties in the locality.
• the physical condition of the property. For example, is repair work needed before the property can be occupied? If so, the lender may offer the mortgage with a  retention of some of the loan until the necessary work is carried out and inspected.

As you can see, a lot of time, effort, and expertise is required to carry out a commercial property valuation, so they tend to be more expensive than their residential equivalents.

Valuation costs are borne by the borrower. Some property types, such as factories and industrial units, can require specialist reports, adding to the overall cost.

Can I capital raise against a commercial property?

Yes, with sufficient equity, you can raise additional funds against a commercial property.

The maximum LTV is typically 75%, though it may be possible to extract more equity if you have additional properties the loan can be secured against.

Capital raised can be used for business purposes, such as business investment or putting down a deposit to buy another commercial property.

What size deposit do I need for a commercial mortgage?

Reflecting the riskier nature of commercial lending, most business mortgage providers specify a maximum LTV of 60-75%. So you'll need a 25%-40% deposit.

If you own additional properties the lender can secure their loan against with a cross-charge, it may be possible to borrow at 100% LTV.

Lenders are also more amenable to lending at higher LTVS for premises in specific professions such as solicitors or dentists.

Can I get a commercial mortgage for a start-up business?

Some lenders do accept commercial mortgage applications from start-up trading businesses.

However, a deposit of up to 50% may be required to mitigate the higher risk associated with the business having no trading history.

What documentation do I need for a commercial mortgage application?

The documentation requirements for a commercial mortgage vary depending on whether you are applying for a commercial investment mortgage or owner-occupier mortgage.

The following documents are required for both:

Proof of ID and Address: Typically, certified copies of all borrower's passports or driving licenses for proof of ID. Bank statements, utility, or Council Tax bills for proof of address.

Personal bank statements. Up to six months of personal bank statements for each borrower. Including the directors/shareholders behind a Ltd company or LLP purchase.

Details of borrower assets, liabilities, income and expenditure (ALIE): All borrowers, including, where applicable, directors and major shareholders, need to provide details of their current personal assets, liabilities, income, and expenditure.

This enables the lender to gain a proper financial understanding of the people behind the commercial mortgage application. Even one in a company name.

Details of any other commercial investment or owner-occupied properties held by the borrowers including the:

• Property address
• Outstanding loan amount
• Monthly mortgage repayment
• Value of the property
• Rental income (if applicable)
• Length of lease (if applicable)

Document requirements for investor commercial mortgages

The Lease Agreement. For a business mortgage, lenders check the covenant strength by assessing the quality of the tenant business and lease agreement in detail. They'll primarily be concerned with:

• The amount of rent paid, and whether there are any upcoming rent reviews.
• The number of years left on the lease
• Whether there are any break clauses and if there are, when they can be triggered
• Whether the tenant has the right to sub-let all or part of the premises?
• Whether the lease is a Fully Repairing and Insuring Lease (FRI)? This means the tenant must pay all the costs to repair, maintain, and insure the property.

Document requirements for owner-occupier commercial mortgages?

Two years of business trading accounts. Some lenders require three years of accounts.

Commercial mortgage underwriters assess net profit, including whether profits are growing year-on-year.

Where there's a large increase, they may want to satisfy themselves the profits are sustainable and not due to one-off factors.  Similarly, a satisfactory explanation for any decrease in profit may be requested

The strength of the company's balance sheet is crucial. Underwriters will examine assets, liabilities, retained profit, and so on.

Up to six months of company bank statements (unless you are buying a business and its premises). Statements are required to ensure current revenue is consistent with the most recent accounts.

Any rental payments being replaced by the mortgage will be deducted from expenditure for affordability assessment.

Details of any other commercial properties - all financial liabilities including mortgage payments on any other commercial properties are taken into consideration for affordability assessment.

How much does a commercial mortgage cost?

Commercial mortgages tend to be custom-priced by the lender according to their manual assessment of the risk they are taking on.

Commercial mortgage rates are higher than for residential mortgages, even if the purchase or refinance is on a semi-commercial or mixed-use property.

What are the typical fees for a commercial mortgage?

Borrowers should budget for several fees when taking out a commercial mortgage:

• Lender arrangement fee. Typically 0.5-2% of the loan amount. Payable on completion but can be added to the loan.
• Broker fee. Paid to the broker for arranging the mortgage. Some brokers also charge a commitment or initial assessment fee.
• Commercial property valuation fee.
• Legal conveyancing fees. The borrower will often have to pay the lender's conveyancing fees as well as their own

How to get a commercial mortgage quote

To get a highly competitive commercial mortgage quote and decision in principle, sometimes the same day, speak directly with an SEMH advisor on 0117 205 0655 today.

We have access to a broad range of commercial mortgage lenders including Interbay, HTB, Lendco, Shawbrook, West One, MT Finance, and many more. We can also arrange bridging loans for commercial property purchases.