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A complete guide to commercial mortgages

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A complete guide to commercial mortgages

Mortgaging is the most popular way of purchasing property and is commonly associated with residential homes. But what about commercial mortgages?

In this article, Commercial Property Associate Patsy Whitford answers some of the most frequently asked questions around commercial mortgages…

How do I start a commercial property business?

Once you have found a property which suits the needs of your business and is financially viable, the first step will be to get a mortgage.

What is a commercial mortgage?

(if you already know what a commercial mortgage is, you can skip this part)

A commercial mortgage is similar to a residential mortgage, in that it is a loan on a property that needs to be repaid (plus interest) to the lender (usually a bank or building society).

Mortgage rates for commercial properties are higher than that of residential homes, as commercial mortgages are seen as being higher risk for the lender.

What is the deposit on a commercial property?

A mortgage requires a deposit – a down payment on the property.

The percentage deposit needed for a commercial property can vary depending on the type of business and its returns, but usually sits anywhere between 10% and 40%.

Properties such as Houses in Multiple Occupation (HMOs) are normally on the lower end of that scale.

What is loan to value?

The loan to value (LTV) is the amount you've borrowed as a percentage of the property's price.

For example, say a property costs £200,000 and you put down a 25% deposit, the LTV would be 75%.

The lower your LTV, the lower your interest rate.

What is a good loan to value ratio for commercial property?

75% or lower is generally considered a ‘good’ LTV ratio for commercial property.

Anything above that may be considered ‘high’ and require additional security from you to the lender.

This may include you putting up an alternative property or asset for the lender to repossess should you default on the loan.

What do commercial mortgage lenders look for?

Lenders will likely look at your business accounts to assess your business’ income and ability to make mortgage payments.

They’ll also assess the business’ current performance and income as well as forecasted income for the future.

As we’ve stated earlier, lenders view commercial properties as being high risk investments; so they may well ask for a personal guarantee or debenture, especially if you haven’t bought a commercial property in the past.

Do you need a business plan for a commercial mortgage?

Potentially. Some lenders have been known to request a business plan as well as everything listed above, although its certainly not something that all lenders will ask for.

What credit score is needed for a commercial mortgage?

It depends on the lender. Some won’t lend at all on ‘bad credit’, whereas some more flexile lenders may do so but ask you to put down a larger deposit or pay a higher interest rate in return.

How long does it take to get a business mortgage?

This depends on many factors and can vary massively between lenders.

In terms of solicitor timescales, and as a general rule of thumb, the legal process can only start once the mortgage documents are provided to your solicitor. Some lenders will insist on having separate solicitors acting for them.

The timescales for completion of the charge depends on the type of property, the number of enquiries to lender raises and how easily these can be satisfied. The enquiries to deal with and the conditions to be met can be very extensive.

It can difficult to set a timescale on this, but mortgage requirements can be dealt with alongside the standard purchase procedure.

Do you pay stamp duty on commercial property?

Stamp Duty Land Tax (SDLT) is a tax that is imposed on single property purchases or documents.

SDLT is applicable to commercial property purchases, but only paid on properties that are worth £150,000 or more.

How much is stamp duty on commercial property in UK?

For properties that are £150,001 to £250,000, SDLT is paid at a rate of 2%.

For properties that are more than £250,000, SDLT is paid at a rate of 5%.

There are different rates for companies purchasing residential properties, but this is quite involved and would be on a case by case basis. 

Find out more about stamp duty in commercial property, including how to get relief, here.

Do I need a solicitor to buy a commercial property?

If you’re using mortgage funding to purchase a commercial property, your lender may require you to instruct a solicitor at your cost.

This may not the case, but either way it is best practice to instruct a solicitor. Commercial property can often be complex, so it is wise to have an expert on your side to ensure that:

  • The purchase will be completed legally
  • The title is correct and provides proper permissions
  • Any applicable rules and regulations have been followed
  • The transaction has been correctly taxed

Read our complete guide to buying commercial property, which includes the tax implications, steps involved and more, here.

Commercial Property Solicitors

At Frettens, our bright and experienced team of Commercial Property Solicitors would be happy to assist you in your purchase, or field any questions that you may have.

If you do have any questions, please don't hesitate to get in touch. We offer a free initial chat for all new clients.

Call us on 01202 499255 or fill out the form at the top of the page to get in touch.

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The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.