How to Find the Best Rates for a Commercial Mortgage

Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Whether you want to release equity from your existing building or purchase a new one, a commercial mortgage can provide the answer you seek. However, getting all the facts right before taking out a commercial mortgage is ideal. 

This guide will teach you about commercial mortgages, what lenders are looking for, properties that can qualify, and how to find the best rates. Read on. 

What are Commercial Property Mortgages?

A commercial property mortgage is a loan secured on a non-residential property. A property qualifies as commercial property if it houses a business, such as an office, or is used as an investment. 

Individuals who take out a commercial mortgage can use it to refinance or purchase properties. The mortgage criteria, designed to cater to a wide range of needs, are usually very flexible and differ among lenders. 

How Lenders Decide Commercial Mortgage Interest Rates

Lenders decide on the interest rate for a commercial mortgage after considering different factors. They include the following:

  • The business’ financial strength
  • The applicant’s credit history
  • The loan amount: The mortgage interest rate increases if the loan amount is large. This is because mortgage lenders take on more risk when the amount is higher. 
  • The duration of the lease and the quality of tenants: This is usually the case when the property in question is an investment property. The interest rate is likely higher if you intend to lease the property to another tenant instead of using it for your business operation.
  • The loan-to-value (LTV) ratio: This is a key factor in determining your interest rate. It compares the amount you want to borrow against the value of the property. For example, if you want to borrow $ 500,000 for a property valued at $ 1,000,000, your LTV ratio is 50%. The higher the LTV, the steeper the interest rate. 

In addition to these factors, each lender has its unique calculation methods and pricing structure, which will affect the determination of the mortgage rate.

What are Fixed and Variable Rates?

Commercial mortgage interest rates are either fixed or variable. A fixed mortgage rate means that the amount of interest you pay over the life of the mortgage remains constant. 

Depending on the agreement, the interest rate can be fixed from the third year up until the full length of the loan term. A fixed-rate can help your business in years when the financial market fluctuates. 

Variable mortgage rates, on the other hand, can go up or down during the loan’s life span. However, the changes are usually regulated by a defined benchmark. A common benchmark is the London Inter-Bank Offered Rate (LIBOR). The Bank of England Base Rate is also used.

Fluctuations in the financial market affect variable interest rates. As rates go up or down, you may need to adjust the amount allotted to interest repayment monthly. 

Fixed or Variable Rates: Which is Better?

The decision to go for fixed or variable rates depends on your individual preference and specific circumstances. A fixed-rate may be ideal if you aim for stability and greater control of your monthly payments. 

With a fixed interest rate, you can estimate how much mortgage interest you must pay and budget accordingly. Conversely, variable rates can offer more flexibility, but they also come with the risk of fluctuating interest rates, which could increase your monthly payments. If the base rate continues to go up due to the financial market’s conditions, you could pay more in mortgage interest over time. 

Current Commercial Mortgage Rates

Commercial mortgage rates are not constant but are always changing. They can fluctuate between 6% and 12% and are dependent on the size of the loan. For instance, a small commercial loan might attract an interest rate of around 6%, while a large loan could have a rate of 12%.

If you are applying for a small commercial loan, you will likely pay a lower interest rate than an individual taking out a large loan. Additionally, lenders consider investment property loans a higher risk, which attracts a higher interest rate. 

It is ideal to speak with an experienced mortgage broker who can provide details of current rates and help you make an informed decision. They can also recommend lenders and products that are best for your specific needs.

Do I Require a Commercial Mortgage?

Not everyone requires a commercial mortgage. However, a commercial mortgage can be of great benefit to you if you are:

  • A residential property owner with intentions to purchase a block of flats to let to tenants.
  • A commercial property landlord who wants to purchase other properties to let out to businesses. 
  • A business owner looking into buying property to be used for your business operations. 
  • A landlord with various portfolios (residential and commercial) looking to remortgage under a single cheap mortgage.

What is the Right Commercial Mortgage for Me?

The choice of a commercial mortgage depends on your peculiar circumstances as well as what you intend to use the property for. Other factors include:

  • The deposit amount
  • The loan term
  • The business’s financial status
  • The businesses stability 

Before deciding on a commercial mortgage, comparing different mortgage options, their fees, possible associated risks, and interest rates is ideal. 

Speaking with an experienced mortgage adviser will go a long way in helping you make the right choice. A mortgage adviser will look at your circumstances, compare different lenders and their offerings, and analyse the products in the market. Then, they will advise on the best option to choose.

What Properties Qualify for a Commercial Mortgage?

The following are properties that you can take out a commercial mortgage on:

  • Blocks of flats
  • Office buildings
  • Guest houses and hotels
  • Land used for agricultural purposes
  • Nursing homes
  • Property used for doctor’s surgeries
  • Shops/shopping centres
  • Industrial units/ warehouses
  • Care homes
  • Buildings used for dentist’s surgeries
  • Funeral parlours
  • Veterinary practices

Why You Need a Commercial Mortgage Broker

You can finance your property with a commercial mortgage from high-street lenders. However, high-street lenders represent a small percentage of those who offer commercial mortgages, and not all do. 

Several private banks and centralised lenders are offering commercial mortgages to qualified applicants. You won’t find these lenders on the high street; some only accept applications submitted through an intermediary or broker. Therefore, having a mortgage broker on your side will help you get the best deals in the market and simplify the application process. 

While you can apply independently, handling the entire process through a specialist broker is the best way to ensure you get all the competitive products and good rates. Our experienced mortgage brokers are here to support you every step of the way. We will consider your circumstances and link you up with lenders who will offer you the best deals.

What Do Commercial Mortgage Lenders Consider When Assessing an Application?

What lenders consider will depend on the applicant’s circumstances. Mortgage lenders will analyse the state of your finances and that of the business that will be occupying the property.

If you are applying for a commercial mortgage as a residential property investor, you must provide the following:

  • Document showing your property’s estimated rental income or yield
  • Copies of the tenancy agreement
  • Proof of identity
  • Proof of address
  • Personal income evidence

The requirements for a business owner who intends to occupy a commercial property are quite different. The applicant, in this case, will be required to provide the following:

  • Proof of personal income
  • Three years trading figure
  • Documents showing the business financials for three years
  • Three months’ bank statement
  • Proof of address
  • Proof of identity

If you are applying as a commercial property investor, you will be required to provide the following documents:

  • Copies of the lease agreements (In some instances, mortgage lenders may be willing to approve applications even with the property being unoccupied. However, this is usually not common and will come with stricter requirements)
  • Proof of identity
  • Proof of address
  • Document showing rental yield or income. 

How many years is a Commercial Mortgage?

Commercial mortgages are long-term loans whose lifespan can range from 5 to 20 years. However, the amortisation period is longer than the loan term. For instance, a commercial loan with a term of 7 years can have an amortisation period of up to 30 years. 

How Much Can I Borrow when I Apply for a Commercial Mortgage?

The minimum amount you can access varies among lenders. A lender can offer you between £10,000 to £40 million. However, the maximum depends on the property value and other specific requirements.

How Long Does a Commercial Mortgage Application Take?

The application process takes 6 - 8 weeks, including the time needed for submission, offer issuance, valuation, and other steps. 

What is the Loan-to-value (LTV) Ratio for a Commercial Mortgage?

The LTV ratio for a commercial mortgage is up to 75%. However, several factors affect the ratio, including the property type, applicant's credit history, and industry sector. 

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Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

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