A Commercial Mortgage is a mortgage used for the purpose of financing the purchase of a Commercial Property. In order to get a Commercial Mortgage you have to be purchasing either the freehold of the Commercial Property or a long lease ie 99 years or more.
A Commercial Property is a Property with a Business Use. So it includes shops, offices, warehouses, petrol stations, hotels, restaurants etc etc.
There are two categories of Buyer. The first and most common is the Owner/Occupier. The person who is going to operate the Business that is run from the Premises. The second category is the Investor who wants to hold the Property as an Investment and lease it out to third parties.
The most important point to understand is that the way Lenders view a Commercial Mortgage and a Commercial Property is completely different from the way they view residential property. Many first time Commercial Property Owners think that a mortgage is a mortgage and that the rules that apply to a Residential Mortgage will apply to a Commercial Mortgage. They expect to see a wide variety of Commercial Mortgage options including offset mortgages, fixed term mortgages , tracker mortgages etc. They expect 80 or 90%funding to be available and they expect to see mortgage rates of between 2 and 5%. Most importantly they expect to see lots of Lenders competing for their business. They are wrong on all counts. There are only a small group of serious Commercial Lenders. They will normally only offer a repayment mortgage.
Reasons to consider a Commercial Mortgage
If you have a steady business unlikely to grow and require more space in the unit that you purchase then a Commercial Property has many advantages. You are unlikely to need more space in the future. Often the cost of a mortgage can be less than the cost of commercial rent. You have no fear of rent rises. You will have a valuable asset when you retire which you have paid for out of your earnings.
Even if you have a business that is going to expand if it is expanding by acquiring new units to add to the existing units it owns then purchasing a freehold makes sense. The value of owning the freehold of his sites made the business far more valuable over the years than if it had rented them. This is particularly the case if you can use a recession such as the one we areexperiencing at present to buy a property cheaply if you know that your Business will weather the storm and thrive whatever the economic conditions. Then when we come to a recovery you will have an even more valuable asset.
Inflation (which for the first time for some years seems to be surging again) can be another strong reason to buy because it may mean that in 20 years time rents will have rocketed simply due to inflation whereas if you purchased your debt is minimal and your asset is in money terms worth much more
Factors a Lender considers when deciding to grant a loan
Owner Occupiers of a Commercial Property are probably getting their main income from the Business that they operate from the Property. So it is more difficult to assess their ability to repay. Most Lenders will want to see at least 3 years accounts. They will want properly prepared accounts and tax returns to show the income and tax paid. This is where the tax dodger who takes their money in cash will have a problem because a Lender will not lend against undeclared income. Lenders will take into account relevant expenses related to your net profit. So if you pay yourself a wage that is in effect an earning that could go towards payment of a mortgage. The same applies to dividends or to rents that you pay but will not pay if you move to a freehold building.
The Lender then has to ask can your business afford the repayments out of its turnover/ profit. The Lender will be aware that business fortunes can change rapidly. So the first and most important consideration a Lender will have is can you afford the repay the Loan.
Next the Lender will want to consider the value of the Property against the value of the loan. They will want to see in most cases a substantial deposit from your own resources, In many cases that will be 30% or more. Then they will have to value the Property. That valuation will be important but not as important as the ability of your Business to repay the loan. Clients with no mortgage but low income declared are often very surprised that Lenders take very little comfort from having lots of equity in a property.
Your business experience and business plans will be a lot more important to Lenders in the Commercial Market. How successful are you at running your Business. What is your Business.? Is it one that is likely to be able to continue to generate enough income to pay off your Mortgage? What are your plans for the future when you move into your new premises.
How secure is your business if you are not able to run it. Lenders many want to see you have Insurance to cover the situation where you cannot operate your business due to death or ill health
We would suggest that these are not unusual points to consider and that most Borrowers who were going to lend on a Commercial Property would be asking these questions. But what is strange is that a lot of Business people applying for loans just do not anticipate that these questions will be asked and have difficulty in supplying answers to them.