Mortgages for business
What are mortgages for business?
Mortgages for businesses are also known as commercial mortgages. These are mortgages you can get if you need to borrow more than £25,000 which is where most business loans may be able to get you and be unsecured.
Mortgages for businesses are therefore secured on the property but this property cannot be your residential address.
Business mortgages usually have terms of between 3 to 25 years and will usually come with a loan to value of around 70 to 75%.
If the business mortgage is being taken out for an investment property then the amount you may be able to borrow with a business mortgage may be based on the rental income the property will be able to generate.
If you are buying a business with a business mortgage and this business includes stocks, goodwill etc then the mortgage lender will likely offer you an even smaller loan to value.
Alternatives to a business mortgage
Bridging loans can help you complete the purchase of a property before you manage to sell your existing home.
Short-term loans can help you access funds without making any long-term commitments. This is often used for financial relief to cover working capital, cash flow, and a variety of expenses.
Personal loans can be used to borrow anywhere from say £1,000 to £25,000 – you do not have to be a homeowner to apply.
Types of mortgages for businesses
There are two main types of mortgages for businesses.
The owner-occupier mortgage:
This is used for properties where you will be the main tenant and use the property as your main place of business.
The commercial investment mortgage:
This mortgage is used on properties which you intend to rent out to generate an income.
How is interest charged on a business mortgage?
The interest charged on a business mortgage is usually a margin over the LIBOR rate.
So, for example, this could be 2% over LIBOR. This is similar to tracker rate mortgages where the rate follows the bank of England rate at a particular margin.
In some cases, you may be able to find fixed rate business mortgages but this will usually be for mortgage amounts less than £500,000.
The rates on business mortgages aren’t set from the offset but rather they are given based on the amount of risk the business mortgage lender feels they are taking by lending to you. If you fall beyond their lending criteria they may simply refuse you a mortgage.
What are the features of a business mortgage?
Business mortgages (commercial mortgages) will usually have better interest rates than a similar business loan as the mortgage is secured on a property.
Business mortgages (commercial mortgages) usually don’t have fixed rates and you will usually have to settle for a variable rate mortgage.
Business mortgages (commercial mortgages) usually charge a higher rate of interest than traditional residential mortgages.
Other facts about mortgages for business
Some business mortgage lenders may request personal guarantees from you if you have not been trading for so long and can’t show up to 3 years worth of accounts. They may still ask for personal guarantees on the business mortgage if you have a low mortgage deposit.
You may be able to find a business mortgage with a higher loan to value than usual by using a business mortgage broker or commercial mortgage broker.
You may still be able to get a business mortgage if you have bad credit but you may have to put a bigger mortgage deposit down and pay a higher rate of interest
Business mortgages may required mortgage deposits of up to 30% and above.
Bad credit could include:
- A CCJ
- An IVA
- A debt management plan
- A default
- A bankruptcy
- A home reposession
Because business mortgages are secured on the property, if you default on the business mortgage your home will likely be repossessed
What are the benefits of a business mortgage?
Business mortgages can have tax benefits as the interest you pay on the mortgage can be deducted from your taxes. You should seek independent tax advice on this.
Business mortgages (commercial mortgages) allow you to earn a rental income from the properties by using them as an investment.
If the property which you have secured a Business mortgage (commercial mortgages) on increases in value you may see the capital you invested in the business mortgage increase in value too.
Documents you need for a business mortgage
When looking at mortgages for businesses you will usually need some key documents and getting this documents ready before you see a business mortgage broker or commercial mortgage broker may save you a lot of time in the business mortgage process.
The documents you may need include:
Proof of identity and address for yourself and any other borrowers
Lease and/or tenancy agreements for the property
Bank statements usually covering the last 3 months for your business and yourself
Trading figures usually covering the last 3 years for the business
A business plan for financial projections – the business mortgage lender will use this to determine your mortgage affordability
How to apply for a business mortgage (commercial mortgage)?
Business mortgages (commercial mortgages) can be very complex sometimes and a specialist business mortgage broker or commercial mortgage broker may be able to assist you in getting your business mortgage (commercial mortgage).
Here are the typical steps when applying for a business mortgage:
- The business mortgage lender will usually want you to complete and submit the Asset and Liability form online or in person.
- You’ll then be asked to complete the commercial mortgage application form
- You’ll be required to provide information on your business with the documents we mentioned above.
- Your business property will then be valued and the lender may then adjust their loan to value if they feel your property is worth less than initially stated.
- The mortgage lenders conveyancer will carry out all the searches and legal due diligence
- If approved, you’ll receive a mortgage offer
- by the bank or specialist lender.
What fees are involved in a business mortgage?
When getting a business mortgage there may be some costs you will face. They include:
- Mortgage broker fees; If you get a business mortgage broker to help you secure a business mortgage then the broker may charge you a fee which can be up to 1% of the mortgage.
- Arrangement fees: Arrangement fees are the fees the mortgage lenders charge for the admin tasks they have to do when preparing a mortgage offer and managing your mortgage.
- Arrangement fees are usually 1% -2% of the mortgage amount for business mortgages up to £1 million.
- Some mortgage lenders will charge the arrangement fee before they begin the case in case you don’t accept their mortgage offer. You can ask your mortgage broker to discount these lenders if you don’t have the fee at hand or don’t want to risk paying for a mortgage you may not accept.
- Some mortgage lenders will also add the arrangement fee to the mortgage but this will cost you more as you are repaying it over such a long term and being charged interest.
- One way to minimize the effect of this is to overpay your mortgage in the immediate months after getting it but you should be aware of any overpayment charges or limits imposed by your mortgage lender.
- Property valuation Fees: A valuer will visit the property and write a report to the lender. Commercial valuations can start at around £500 for a simple case, the fees are based on an individualised quotation which is payable to the lender after an initial indicative offer has been accepted.
- Legal Fees: You’ll need to pay both your own legal fees as well as the lender’s which can start at around £500 for each party.
Can limited companies get mortgages?
Yes limited companies can get mortgages but these are usually buy to let limited company mortgages or commercial mortgages.
Can you get a mortgage on a business?
Yes, you can get a mortgage for a business but this will depend mostly on your eligibility for a business mortgage.
The eligibility criteria for business mortgages
In order for you to qualify for a business mortgage (commercial mortgage), you’ll need to pass the lender’s eligibility checks which usually includes:
- You usually need a good credit report and history
- If you are using the property to generate income then you may usually need to show that the rental income will be sufficient to cover the cost of the mortgage
- You may need to pay a mortgage deposit of between 20% and 40%
- The cash flow of your business will usually have to be somewhat positive
- Your financial forecast for your business will need to show that you may be able to cover the cost of your mortgage
Can you get a business loan to buy a property?
Yes, you can get a business loan or business mortgage to get a property.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.