Mortgaging is the most popular way of purchasing property and is commonly associated with residential homes. But what about commercial mortgages?
In this article, Commercial Property Associate Patsy Whitford answers some of the most frequently asked questions around commercial mortgages…
How do I start a commercial property business?
Once you have found a property which suits the needs of your business and is financially viable, the first step will be to get a mortgage.
What is a commercial mortgage?
(if you already know what a commercial mortgage is, you can skip this part)
A commercial mortgage is similar to a residential mortgage, in that it is a loan on a property that needs to be repaid (plus interest) to the lender (usually a bank or building society).
Mortgage rates for commercial properties are higher than that of residential homes, as commercial mortgages are seen as being higher risk for the lender.
What is the deposit on a commercial property?
A mortgage requires a deposit – a down payment on the property.
The percentage deposit needed for a commercial property can vary depending on the type of business and its returns, but usually sits anywhere between 10% and 40%.
Properties such as Houses in Multiple Occupation (HMOs) are normally on the lower end of that scale.
What is loan to value?
The loan to value (LTV) is the amount you've borrowed as a percentage of the property's price.
For example, say a property costs £200,000 and you put down a 25% deposit, the LTV would be 75%.
The lower your LTV, the lower your interest rate.
What is a good loan to value ratio for commercial property?
75% or lower is generally considered a ‘good’ LTV ratio for commercial property.
Anything above that may be considered ‘high’ and require additional security from you to the lender.
This may include you putting up an alternative property or asset for the lender to repossess should you default on the loan.
What do commercial mortgage lenders look for?
Lenders will likely look at your business accounts to assess your business’ income and ability to make mortgage payments.
They’ll also assess the business’ current performance and income as well as forecasted income for the future.
As we’ve stated earlier, lenders view commercial properties as being high risk investments; so they may well ask for a personal guarantee or debenture, especially if you haven’t bought a commercial property in the past.