How to get a second mortgage for commercial property and what you need to consider

Securing a second mortgage on a commercial property can be a strategic way to release further equity without disturbing your existing first mortgage.

This remains a popular option for business owners looking to:

• Fund expansions,
• Manage cash flow or consolidate debt.

But how does this work, and is it the right option for your business?

You might be asking:

• Can I take out a second charge mortgage on a commercial property?
• How does it differ from remortgaging?
• What are the risks and benefits I need to weigh up?

In this article, Commercial Property Expert, Hannah Martin answers all your questions about second mortgages and more.

What is a second mortgage on a commercial property?

A second mortgage is a secured loan taken out against a property that already has an existing mortgage. It uses the equity (the difference between the property’s current market value and the remaining balance of the first mortgage) as collateral.

The first charge will remain on the Property, and they will have the primary claim if the Property is sold. The Second Lender will be ‘second in line’ for repayment.

What is the criteria for second mortgage?

A lender's criteria for granting a second mortgage will always be determined on a case-by-case basis, but before looking for a second mortgage, you should first check with your existing lender to ensure that they would be happy to allow a second mortgage to be registered.  

Is a second mortgage a good idea?

The Pros of second mortgages are:

• Preserve your first rate: if your original mortgage has a very low interest rate, a second mortgage lets you keep it while borrowing more.
• Avoid exit fees: remortgaging can trigger heavy early repayment charges. A second mortgage avoids these.
• Speed: they can be faster to arrange than a full commercial remortgage.

What is the downside to a second mortgage?

The Cons of second mortgages are:

• Higher costs: interest rates and arrangement fees are generally higher.
• Two Payments: you will have two separate monthly outgoings to manage.
• Risk of repossession: failure to pay either loan puts your business premises at a higher risk.

Is it better to remortgage or get a second mortgage?

There is no set answer as to which one is better as it will ultimately depend on your situation and your business needs. You should always seek financial and tax advice before entering into either, to determine which one could be more appropriate for you.

How long does it take to get a second charge?

In most cases, arranging a second mortgage can take around 4-8 weeks, but this is always dependent on a number of factors, including:

1. Obtaining consent from your first lender – this can take anywhere from a few days to several weeks, depending on their process.
2. The level of due diligence required by your new lender – they will usually require updated searches, checks on title and often require a valuation to be carried out.
3. Negotiation of any priority or consent documents between the lenders.

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If you have any queries following this article, please don’t hesitate to get in touch with our bright Commercial Property Team by calling 01202 499255 or by filling in the form.