How Does a Mortgage Work?
If you’re looking to buy a commercial or semi-commercial property, you may well be aware of commercial mortgages.
In this guide, experts at ABC Finance help Finance Monthly break down what commercial mortgages are, how they work, how the application process works and how much you’re likely to pay.
What is a commercial mortgage?
Commercial mortgages are, much like residential mortgages, a long-term long which is used to purchase or refinance a property. As with residential mortgages, the lender takes security over the property or land in question and allows you to borrow money against it.
Commercial mortgages aren’t just used to raise money against commercial or semi-commercial property, usually almost any security can be considered. It’s common to see a commercial mortgage used to fund land or even predominantly residential security, such as large HMOs, large buy to let portfolios and holiday lets.
Commercial mortgage uses
Funding can be arranged for one of two main reasons:
- To purchase or refinance a property for your business to trade from;
- To purchase or refinance a property as an investment.
Although almost all applications will come down to one of these two reasons, each application will have its own intricacies and lenders will be flexible in understanding your circumstances.
As mentioned above, unlike residential mortgages, commercial mortgage lenders are generally quite flexible in the security offered. Commercial mortgages can be an ideal option for unusual properties, or even to raise finance against land.
The documents needed to apply for a commercial mortgage
When you apply for a commercial mortgage, the lender will usually want to see a number of supporting documents to help them assess your application. Although the exact documents required will vary from lender to lender, there are a number of documents that are commonly requested.
Firstly, the lender will want to check that the proposed mortgage is affordable. To do this, they will request a copy of the latest two years accounts for owner-occupied applications, or a copy of the lease, or leases for investment properties.
These documents are used to assess the proposed repayment against the money coming in.
In addition to the accounts or leases, the lender will also request 3-6 months bank statements, which will be used to check your account conduct. This gives the lender an understanding of how much of that income is left at the end of each month, and how well the account is managed.
For investment properties, only personal bank statements are required. For owner-occupied properties, the lender will also request your business bank statements.
The final document that is requested on almost every application is an assets, liability, income and expenditure summary. This gives the lender a breakdown of your personal cash flow and net worth positions.
This document provides a simple insight into your personal finances and alerts them to any potential future problems.
How are commercial mortgages assessed by lenders?
The processing of commercial mortgage applications is more of a manual process than residential mortgages, which are largely assessed by a computer.
Lenders will often take a common-sense approach to situations and will look at the bigger picture to fully understand the circumstances surrounding the application.
The other big difference between residential and commercial mortgages is that the valuation is undertaken later in the process. A surveyor is not usually instructed until after the mortgage offer is issued.
As a result, applications tend to take longer than standard mortgages, with applications usually taking 6-8 weeks to complete on average.
Commercial mortgage rates and terms
Commercial mortgage rates can vary widely between lenders. For an owner-occupied application, rates of between 2.75% and 3.75% are average for high street lenders.
Commercial investment rates range from 2.85% to 4% on average from the high street banks.
Challenger banks will usually charge a little bit more but will be more flexible in their lending criteria. Rates start from 4.29% and tend to hit around 7% for higher risk, higher loan to value applications.
In addition to the interest charged, lenders will usually charge an arrangement fee of between 1.5-2%. This is usually paid on completion and can be added to the loan in most cases.