UK Guide to Commercial Mortgages
Commercial mortgages are the most popular method of financing the acquisition of land and buildings for business purposes. They are usually the most keenly priced and flexible finance solution. As with other mortgages, the commercial lender has legal claim or lien over the commercial property until the liability has been fully paid back.
There are two broad types of commercial mortgages. The 'owner occupier' commercial mortgage is where the borrower wishes to acquire the business premises in which he or his firm will work. Secondly, a commercial mortgage as a 'commercial investment' where the borrower purchases the property with a view to renting it out.
Commercial mortgages form part of a marketplace that is much more complex than the residential or buy-to-let sides. As a result, it is generally not as fluid, nor quite as competitive.
As there are more variables than in the residential market, the pricing up of mortgages is not a simple affair and there are a number of different models used by the lending institutions.
For amounts over around £500k, they will get the best price from the money market which depends largely upon the SWAP (UK interbank) rate.
The rate the borrower will be offered and the structure of the deal also depends upon the quality and credit history of the tenant (and the proprietor, if different), and on the industry sector. As a general yardstick for small/medium commercial borrowers, you could expect a loan to value ratio of 75%. This can rise up to 90% for larger borrowers with excellent track records.
Some lenders prefer to base the maximum commercial loan amount on the expected rental coverage. This pricing technique is common amongst High Street banks. A typical ratio is 130%. So this means that the annual rental return should be 130% of the commercial mortgage payments. Take an example of an office building that is on the market for £1,200,000. It is let out to tenants who pay £90,000 each year in rent. The question is what is the maximum amount that can be lent via a commercial mortgage? The ratio of rental cover being used by the lenders in this case is 1.3 (i.e. 130%). The lenders are not concerned with the asking price of the property. They will divide the annual rent i.e. £80,000 by 1.3 to give £61,538, the maximum amount of annual interest. Let's say the prevailing commercial interest rate at this lender is 6.5%, then the maximum amount they will lend is going to be somewhere around £946,000.
The typical period for a commercial mortgage is around 15 years, but can sometimes extend to 25 years.
Are there any other costs?
There is usually a lenders fee of between .75% and 1.25%. A valuation must be completed which is almost always more expensive than a residential valuation. Legal costs are also going to be higher, reflecting the extra complexities of this kind of transaction.
Using an expert broker is essential in order to structure and negotiate the deal most cost effectively.
