If you’re unsure about how a commercial mortgage works and whether it’s right for your business read on for our helpful guide…
What is a commercial mortgage?
A commercial mortgage is a loan that is secured against a property which is not currently owned by you.
Buy-to-let mortgages are slightly different as they are a higher volume commercial mortgage which is presented to a volume market.
How does a commercial mortgage work?
When it comes to a commercial mortgage there are no set rates, this means that every single application that is submitted to a lending manager is reviewed thoroughly as they look into the risk levels.
FACT: A larger loan with a lower risk will always receive the best rates. Lenders will often have a risk profile that they will go through when processing an application. If your loan falls outside the catchment then you will be declined.
Who uses a commercial mortgage?
Commercial mortgages are aimed at businesses that are looking to purchase a property or to release value from an existing building which could then be invested into the business.
What paperwork do I need to produce for a commercial mortgage?
When applying for a commercial mortgage, the usual documents needed will include profit/loss statements, tax returns, rent roll, and photos of the property, a personal finance statement and summaries of capital improvements.
Can I use a commercial mortgage if I have bad credit?
Yes, if you have bad credit you are able to get a commercial mortgage, however, due to your credit score, it will be harder to acquire the loan – in some circumstances, you will have to seek a specialist bad credit commercial mortgage lender.
Because of your bad credit, you are deemed as a higher risk to lenders, this may cause the rates of the amount you are looking to borrow increase. The reason for this is so that they can recover if you are unable to pay.
What are the pros and cons of a commercial mortgage?
Pros of a commercial mortgage
- There is no scope for rent increases
- There is a chance that you can sub-let free space in the building (you will need permission from the lender)
- You are able to add, change and decorate as and when you please.
- The interest payment on a commercial mortgage is tax-deductible
- If the buildings value advances then your capital will also increase.
Cons of a commercial mortgage
- As you are essentially buying a building, you are required to pay a considerable deposit which might be suited elsewhere in your business
- If you were to relocate in the near future moving may be more difficult as you will be removing yourself from the confirmed rental agreement
- It is your responsibility to look after your building, if there are issues such as maintenance or fixtures then you are in charge of fixing them
- If your commercial mortgage is variable then you are opened up to interest rates increasing
- If the building loses value then your capital will also decrease
Is a commercial mortgage the right choice for my business?
If you are looking to purchase your own property then a commercial mortgage is the right thing for your business or if you are looking to release the value of your existing property then a commercial mortgage is also right for you and your business.
If you have already found your new building but can’t sell your current one then a commercial mortgage is not right for you… a bridging loan is.