By Gary Hemming, ABC Finance
Knowledge of the commercial mortgage market can be crucial for business owners, but there isn’t a great amount of information online.
With many business owners lacking knowledge on this crucial area, we are going to break down exactly what commercial mortgages are, how they work and give you some of the key points to consider before applying.
Most people are familiar with residential mortgages, so we will use them as a reference throughout the article to make things easier to understand.
Commercial mortgage uses
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It’s easy to assume that as residential mortgages are for residential properties, commercial mortgages are for commercial properties. This is only partly true.
Commercial mortgages are usually used to raise finance against commercial property, but they can actually be used to finance a wide range of properties. Other potentially suitable properties include homes with equestrian facilities, large rental properties (such as entire blocks of apartments) and even land with no attached buildings.
Commercial mortgages are generally arranged for one of 2 purposes, to purchase a property to trade from or to be let out as an investment, much like a residential buy to let. They are available for both new purchases or remortgages, again much like residential mortgages.
Commercial mortgage lenders
There are numerous commercial mortgage lenders out there, the main types are as follows:
High street banks will usually offer the lowest interest rates but tend to have strict criteria. This can make securing a commercial mortgage from a high street bank tricky and the process is often slow.
When taking a commercial mortgage from a high street bank, they may want you to switch your business banking to them, to allow them to keep track of the account.
Finally, as they tend to have the tightest criteria, you may well find that you can borrow less through a high-street bank than through the other types of lender.
Challenger banks tend to be more flexible in their approach. This means that they are likely to offer a more straightforward application process, higher loan to values and will not insist on you moving your banking.
There is a price to pay for this increased flexibility and that comes in the form of higher interest rates. As competition increases in the market, the gap is closing, but the lowest rates are still to be found on the high street.
Some of the more specialist lenders tend to be lesser known but focus heavily on a highly flexible approach. Applications tend to be assessed on a case by case basis, most properties can be considered and can be completed quickly where needed.
There are two major downsides to this increased flexibility and that comes in the form of a lower loan to values and higher interest rates.
Key points to consider before taking out a commercial mortgage
Taking on a commercial mortgage, especially for the first time is a big decision and as such, it’s important that you get it right. Before applying, there a few key points that you must consider.
Fixed rates vs variable rates
Fixed rates offer more stability as you can be sure that your monthly repayments will remain the same throughout the fixed rate period. Most lenders will offer both fixed and variable rates.
Variable rates will tend to be slightly lower to start with, although they could increase at any time.
There is a decision to make before you apply as to whether your focus is on the cheapest product initially, or stability of knowing that your rate won’t increase. You should always make sure that the mortgage is not just affordable now, but also in the future.
Interest only vs capital repayment
Capital repayment mortgages see you pay off the loan over the course of the term, much like a personal loan. This gives you the certainty that the loan will be fully repaid as long as you make each payment on time and in full.
Interest only mortgages only require you to pay only the interest on the amount owed each month. This means that your monthly costs are lower, but you will still owe the same amount at the end of the term.
Broker vs direct to the lender
A good commercial mortgage broker will be able to access the whole market and will work on your behalf to secure you the cheapest possible deal.
As commercial mortgages tend to be for large amounts of money, even a small reduction in the rate charged can represent a significant saving over the term of the loan.
The downside to this is that some (but not all) brokers will charge a fee for their service, which can potentially cut into the savings made.
When you work directly with a lender, they will only offer their own products, meaning that you could miss out on a potentially cheaper deal elsewhere. You could check with multiple lenders to find the best deal, but this could get very time consuming and not all lenders will deal directly with the public.