Sep 26, 2022
Businesses buy commercial property for a variety of reasons: they might want to purchase a premises for their business, or add to their buy-to-let portfolio, for instance. Yet many business owners lack the cash to be able to buy commercial property outright, and this is where commercial property finance comes in. But how accessible are commercial property loans, exactly?
Owning a commercial property can strengthen your business’ balance sheet, making it easier for you to get finance in the future. However, buying a property is an expensive endeavour, and you need to ensure that you can meet the repayments.
Commercial mortgages (also known as business mortgages) are arguably the most common type of finance used for commercial property purchases.
They’re similar to residential mortgages in the sense that monthly repayments cover the money borrowed, alongside interest charges.
Commercial mortgage interest rates are informed by a number of factors, including the Loan-to-Value ratio, size of the loan, the business’ trading and credit history, its financials, who will occupy it, and whether or not a personal guarantee is provided.
The majority of commercial mortgage lenders provide up to 75% of the property’s total value, so bear in mind that you’ll have to have the cash to make up the difference. Consider whether or not you’re willing to tie up this amount of cash in a property.
Each lender has their own eligibility criteria that you’ll have to meet to be approved for finance. You’ll have to pass their affordability test: this helps them decide if you can afford the mortgage repayments on top of your other financial obligations.
Owner-occupied commercial mortgages are designed for businesses that will occupy the premises themselves. A business might use this type of commercial mortgage to buy its first commercial property. Or it might be expanding and need to purchase another.
If you’re interested in getting an owner-occupied commercial mortgage, the lender will look closely at your business’ trading history when making a decision about rates and terms.
Be prepared to provide a minimum of three years of filed accounts together with predicted profit and loss statements.
If you’re planning to buy a property to rent out to another business, you might be considering getting a commercial buy-to-let mortgage.
You’ll need to ensure that your rental income will be able to cover the mortgage payments, and you’ll have to prepare a tenancy schedule.
Residential buy-to-let mortgages – you guessed it – are designed for those who want to buy a property to rent out to residents. They can be used by individuals with one rental property through to professional landlords with large portfolios.
Depending on risk, borrowers will have to provide a deposit of 25-40% of the property value. Credit history and income will also be taken into consideration.
The borrower must be between the ages of 18 and 75, yet many lenders will reject applications from borrowers who will be over 75 when the repayment term ends.
Some business owners who take out a commercial mortgage decide to set up a limited company. What you decide to do will depend on your own circumstances and plans, so be sure to research the benefits and drawbacks of each before you make a decision.
Bridging finance also falls under the commercial property finance umbrella. As the name suggests, it’s used to “bridge” a gap in funding while longer term funding is arranged.
Some people use a bridge loan to buy a property at auction because it’s much faster to secure than a mortgage (it can sometimes be arranged in just 48 hours).
Bridging finance can also be used if you want to convert a property into a commercial premises, or if you need to build up trading accounts before you apply for a mortgage.
The loan is typically secured against the property being purchased, however this isn’t always the case. For instance, other investment properties can be used in place of or in addition to the commercial property being bought.
To qualify for bridging finance, the borrower must provide an exit strategy – a plan for how and when the loan will be repaid. Be mindful that lenders can apply fees and penalty charges for late repayments on open or closed bridging loans.
Property development finance is a broad term for finance that is used to fund residential, commercial or mix-use property developments.
For example, a property developer might use it to help pay for a residential housing project, workspace development scheme or a regeneration initiative.
If you’re looking for development finance, acceptance and interest rates will hinge, to some extent, on your property development track record and the strength of your business plan.
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