A Commercial Mortgage is used when a commercial development plan requires extra funding after the initial development has ended. This type of loan is secured against commercial property, whether that is business premises, a restaurant, a shop/supermarket, or even a factory. Commercial Mortgages are much more flexible than Residential Mortgages; interest rates are generally much lower and repayment terms much shorter. This is because small businesses provide a bigger business to the lender than residential properties do, so lenders are more willing to offer a larger amount of capital.
As a result, there is a large level of incentive available to commercial mortgage customers as there is plenty of competition between banks/building societies for their custom.
In fact, many of the most successful and powerful commercial mortgage lenders, as well as top commercial mortgage brokers, avoid originating small balance loans to businesses. As far as the lender is concerned, the amount of work and the effect involved in closing a small loan is exactly the same as closing a big one, but the compensation to the firm can be 10 times less.
Borrowing money to purchase commercial real estate is obviously more expensive than borrowing funds to buy a home. Lenders typically consider commercial loans to pose a greater risk than a consumer mortgage loan. So, in order to be reviewed by a lender, a business must prove that it will be a profitable and stable investment. Some mortgage lending companies may insist that you have been in business for a minimum of 5 years.
They may also require that you commit to financial reporting on a regular basis. Financial records just like your company’s income tax returns and balance sheets for the last 3 years will be essential as well. Lenders have tight restrictions, such as those listed above, in order to minimize the level of risk involved in investing in small business.
There are various requirements in order for a small business to qualify for a Commercial Mortgage. First of all, you need to clearly specify your plans for investing the money borrowed from the bank or financial organization. Another requirement is the mandatory insurance of the machinery, goods, or material that you are buying to ensure the timely repayment of the amount in case of a mishap like fire or accident. You will also have to present the details of the company you are dealing with, and the way in which you will use the loan amount, as well as any other information that the lending company might require.
Maintaining the accounts of the company is also essential, particularly before and after having the loan sanctioned to you. Most lenders will apply a loan-to-value ratio and will expect you to invest a proportion of your own money in the purchase. The more of your own money you are willing to invest in the business, the more likely a lender will give you the capital you require.
The loan-to-value ratio is the loan amount divided by the current market value of the property expressed as a percentage. For example, if a property has a current value of 200,000 sterling pounds, and a loan is required for 150,000 sterling pounds, the loan-to-value ratio is 75%. Doing all the above-mentioned steps is essential to have a commercial loan sanctioned. Once the mortgage is obtained, it usually lasts around 15 years or more and the repayment of the loan is at the discretion of the lender. Typically, interest rates are set between 1 and 6% above the Bank of England base rate.
However, different kinds of commercial mortgages are repaid in different ways. For example, if you have a repayment mortgage (sometimes called a capital and interest mortgage) you repay a portion of the loan and the accrued interest each month. Whereas an interest-only mortgage means only the interest on the debt is paid off with each monthly payment.
There are various benefits of buying a commercial building. For example, your mortgage repayment is likely to be similar to a rental payment on the same property with a fixed-rate mortgage and your monthly repayments will be predictable and stable. Similarly, you are not exposed to any free space, reducing your monthly repayments and any gain in the value of the property will increase your capital. As your business grows, you may be able to extend your existing premises, avoiding relocation costs and interest payments on a commercial mortgage are tax-deductible.
Unfortunately, there are also some disadvantages to buying commercial property. In this instance these include; you must come up with a substantial deposit usually at least 25% of the purchase price of the property and any fall in the value of the property will decrease your capital. If you own your own premises, you may find it harder to relocate your business, because selling business premises is not always easy.
Similarly, owning a property means you will be responsible for factors such as maintenance, fixtures and fittings, insurance, decoration, and security. If you rent, you may be able to negotiate to end your rental agreement or to find another organization to take over your tenancy.
Just like remortgaging a home, commercial second mortgages are also a good option for successful small businesses. This form of commercial loan is often used in conduction with a new first commercial mortgage loan. Generally, commercial second mortgages have a repayment term of around one to five years with interest-only payments. There are various advantages in obtaining a commercial second mortgage, for example, it can reduce the loan to value (LTV) of the first mortgage.
Other uses for a commercial second mortgage are to finance business expansion and construction, working capital, consolidation of debts, pay tax arrears, or for renovations. The idea is to give the business premises time to appreciate over time which then allows the consolidation of the first and second mortgages.