If you want to take the leap and buy your own commercial property instead of endlessly renting, then a commercial mortgage may be just the ticket. Commercial mortgages can help you split up repayments over a standard mortgage period, making buying a commercial property or development that much more accessible.
Knowing they exist, however, is different from knowing how to get one, so if you’ve ever asked yourself, “How do I get a commercial mortgage?” Then this guide is for you:
What is a Commercial Mortgage?
A commercial mortgage is a mortgage loan used to buy any type of commercial property. You would need one to buy or even develop the following:
- Apartment buildings
- Shops and retail
- Warehouses
- Manufacturing plants
Commercial mortgages can last anywhere from 3 to 25 years. You can usually get one to cover 70 to 75% of the property price.
Types of Commercial Mortgages
There are two types of commercial property mortgages that you can get as a business owner.
Owner-occupier mortgages
An owner-occupier mortgage is one that helps you buy a property your business will operate out of. A retail store, for example, will need an owner-occupier mortgage. The same goes for a warehouse or manufacturing plant that you intend to use for your own operations.
Commercial investment mortgages
If you plan on buying the commercial property to rent out to either residents or other businesses, then you will need a commercial investment mortgage. You can own a retail store, for example, and then let it out to another brand.
How to Get a Commercial Mortgage
Now, let’s move on to how to get a commercial mortgage. This guide will cover the basic information you need to know before you get started, but for more specific information about the commercial mortgage process, with your exact situation in mind, you should get in touch with a mortgage advisor.
How to Get a Commercial Mortgage: Step by Step
- Outline your commercial property needs: The best way to find a commercial property that suits your business is to start outlining what you need and then use that information to look for properties.
- Put together the deposit: You’ll want to have a look at how much properties that fit your requirements cost, then start saving up for a deposit. You’ll need at least a 25% deposit, though usually more, to secure a commercial loan.
- Create a business plan: create a business plan for how you plan on using the commercial property to grow your business. Include financial forecasting. This will help you use the property more efficiently if you get it and can help with your application.
- Use a mortgage broker to find your lending range: Use a mortgage broker to find what lenders are available and what they can offer you.
- Get a mortgage in agreement: If the amount suits your needs, get a mortgage in agreement. This will be used to help put in an offer.
- Put in an offer for the property: Find a property that suits you and put in an offer.
- Make your mortgage application: Make your mortgage application. This could be with the same lender you have a mortgage in agreement with, or it could be another lender if you find a better deal.
- Collect the necessary documents: Provide all necessary documents to prove your business can pass affordability checks.
- Valuation and surveyor checks: The lender will carry out valuation checks to understand the value of the property. You should also carry out surveyor checks to find any structural issues.
- Sign and complete your mortgage offer: If all goes well, you’ll get the final mortgage offer, which you can then sign and send off. The funds will be released, and you can buy your commercial property.
Paperwork and Documents You Need for a Commercial Mortgage Application
The paperwork that you’d need depends on your business type. In general, you need to prove that your business has a solid and strategic plan to succeed, is profitable, and has a debt-service coverage ratio (DSCR) of 1.25 or higher (meaning you would bring in more than the mortgage). To do that, you’ll want to put together these documents.
· Business plan
A strong business plan can help convince lenders that not only do you have a very strong plan for succeeding in the future but also that buying the commercial property will help your business grow and become more profitable.
· 3+ years of financial accounts
Just as with a standard mortgage, you will also need to prove your financial history. You’ll need at least three or more years’ worth of financial documents. If you can prove that you have a solid income and are growing or staying steady, then lenders will be more likely to look at your application.
· Property valuation
You can usually only get a commercial mortgage for 75% of the property’s value at maximum. This means you will need either a very large deposit to cover the rest or manage to negotiate the property price for less than its value (extremely rare).
Frequently Asked Questions
Can I get a fixed-rate commercial mortgage?
No, commercial mortgages usually come without a fixed rate option. They do, however, tend to have lower interest rates than regular business loans as you are using your property as collateral.
What can I do if I need the money to secure a property ASAP?
If you need to move quickly to secure a property, you can get a bridging loan. Do be careful, however, as if your commercial mortgage falls through, you may be put in a tough spot.
What can I do if my mortgage application is rejected?
If your mortgage application is rejected, you can try to appeal, or you can wait six months to try again. In the meantime, see about renting your commercial property instead. If you can provide proof of profit operating out of a rental, you can then use that towards your next mortgage application to increase your chances of success.
