Overview of Commercial Mortgages
Commercial mortgages are secured loans used specifically to fund the purchase of commercial property.
A commercial mortgage loan is generally a complex assessment of multiple credit and risk parameters which often requires a significant investment in time if the best offers are to be secured.
Businesses may wish to undertake the research themselves. Good practice though, is to engage a commercial finance broker whose experience, market knowledge, and contacts will ensure a speedy and complete assessment of needs, and match these to the best value, lowest cost products on offer.
High Street Institutions generally seek to minimize their risk in any financial transaction. Small companies who decided to arrange their own commercial loans through their account holding banks may find that they need to reduce the bank's risk by having charges applied to other assets including private residences.
This does not have to be the case, so advice should be sought from a commercial finance broker before any such commitments are made.
The Two Basic Forms of Commercial Mortgage
Both types of commercial mortgage have particular client benefits.
Status based mortgage loans based largely upon the profitability of the business, quality/volume of supporting data, the business experience and the credit history of the prospective borrower, and opf course, the value of the loan required. In other words a thorough risk assessment.
Self-Cert Mortgages are based on the property value i.e the brocks and mortar value.
Again for each type of loan different lenders take differing views on what constitutes risk, and therefore what charges they apply.
How Much Money Can You Borrow
Typically, business mortgage offers are of between 50% and 85% of the loan to value (LTV) of the property, depending on the business use for that commercial property.
There are methods of structuring finance through the use of specialist lenders, unsecured loans etc, so that an applicant can obtain up to 100% of the required loan amount. (In some cases, charges against additional properties held by the applicant may be requested by the lender.)
Commercial Loan offers can range from £20,000 to £20m, but the most common commercial mortgages are between £50,000 and £2m.
Most start-up businesses wanting to purchase commercial premises will need to have a deposit sometimes obtained through financial products such as unsecured loans.
In this case the payment profile of the unsecured loan may be taken into account within an affordability study by the mortgage lender.
If the company has a good business plan and can back up its projected income figures, a Small Firms Loan Guarantee may be a suitable option.
Costs Of Commercial Business Mortgages
Cost of the Commercial Business Mortgage
Business mortgage loans are contracted at between 1 and 7% over either Bank of England or LIBOR (London interbank offered rate) base rates, depending on the lender.
The exact rate that you will be quoted with directly relate to the financial status of the Directors/Company, the time you have in which to arrange the finance, and the availability/quality of supporting business plans, forecast projections etc.
The credit history of the Directors will also be factored into the risk assessment, and subsequent APR rates offered.
Lender Arrangement Fees
Every lender will charge a lender arrangement fee for setting up the mortgage contract. These will include the lender's solicitors costs, credit checks, and assessment of application forms and supporting documentation.
Lender fees vary from lender to lender, but on average, a lender will charge in the region of £5,500 for a £300,000 loan. This charge is based on a rate scale and is different for each lender.
Currently, commercial mortgage lender arrangement fees are often lower than those charged by residential mortgage companies for similar sized loans.
Property Valuations Fees
Before any lender will make an offer they will want to ensure that the property is worth the money they are lending.
In the case of investment properties they want to ensure that rental income will cover the monthly repayments.
A valuation is performed by a 3rd party, often local to the premises being valued, and with local knowledge of similar property sale values and the availability of tenants.
Associated Commercial Mortgage Information
· Self Certified Commercial Mortgages
· The Mortgage Application Process
· Introduction To Commercial Lenders
· Commercial Mortgages FAQ
If You Require a Commercial Mortgage Broker...
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