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Commercial mortgage rates and fees

Commercial mortgage rates are different than that of a residential or buy to let mortgage. Lenders do not have set rates based on Loan to Value (LTV), or the applicant(s) risk. Each business is reviewed individually on its circumstances.

When applying for a commercial mortgage, many lenders do not lend directly to businesses so you may benefit from speaking with a broker to make sure you have checked all options.

Make sure that the broker is a member of NACFB as this will mean they have to follow a set code of practice.

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What is a commercial rate based on?

Lenders will look at two main factors when deciding on the rate.

Risk – this will be measured on the following factors:

  • How long has the business has been running
  • How successful the business is, is it making money?
  • How many debtors the business has
  • The credit history of both the business and its directors e.g. CCJs could have a negative effect on the rates
  • Will the directors put a personal guarantee that will be secured against their personal assets?

Value – The amount borrowed could affect the rate. Generally, the larger the loan the lower the rate.

Deposits and duration

The general rule of maximum LTV is 75% although it is possible to get access to a higher LTV through a specialist lender. But these commercial mortgages will be hard to get with higher rates therefore potentially more expensive.

So typically, a deposit of 25% to 40% would be required.

With a commercial mortgage you can lend up to 40 years. Unlike residential mortgages whereby the duration is based on a person’s working life, a commercial mortgage is based upon the business itself.

Where to get the best rates

The high street banks will often offer the cheapest rates, however, their lending criteria can be tight therefore don’t accept all businesses.

Back in 2014, the Department for Business Innovation & Skills published evidence suggesting that 40% of businesses give up their search for finance after being rejected from the bank.

The good news is that now there are more alternative lenders out there than ever before with the new challenger banks and the rise of peer-to-peer lending. Whilst it’s a more expensive option than your high street bank, due to the increase in competition the costs are starting to go down.

Don’t forget fees

When looking for a commercial mortgage, don’t just look at the rates and your monthly costs. Remember to take into account the overall costs over the duration of the loan.

Legal fees

Just like buying a house, you need solicitors to make sure that everything is correct and that at the end of the process there is no question that the property is yours.

You will be required to pay the legal fee of yourself and the lender. Fees are generally around £500 but this will depend on the complexity of the case.

Valuation fees

The valuation of a commercial property is far more complex than a residential property. This is due to the varying types of buildings and features which may affect its value.

The costs will typically start at around £500 but may increase depending on size and even the awkwardness of the valuation itself.

Lender arrangement fees

Fees will often be required to cover the cost of setting up the mortgage. This is an admin fee which can also be a ‘commitment fee’ in case you pull out of the deal after all the work has been completed.

These fees will often be higher when looking to borrow a lower amount and can vary between 1% to 2%.

Broker fees

Some brokers will look to charge you a fee for finding a mortgage, typically over £200. This practice is becoming less common, but you need to bear in mind that this fee is non-refundable.