A commercial mortgage is a loan for property that is not your main residence. A typical commercial mortgage loan is for buy-to-let property, but many businesses also use commercial mortgages to finance new property purchases when they expand.
Qualifying for a commercial mortgage loan
There are many different criteria for qualifying for a commercial mortgage, and each application is assessed individually. The lender will need to be convinced that the borrower can keep up with the monthly repayments. For buy-to-let property, the level of rent received is taken into account. A rough guide is that rents should cover at least 125% of the mortgage repayments.
The lender must also be satisfied that if interest rates go up, the rent will still cover the repayments.
The mortgage amount
Most lenders will only provide a mortgage of around 70% of the value of the property, with the remaining 30% required as a deposit. If a borrower does not have the full deposit, but owns other property, then the lender may allow the existing property to be used to secure the commercial mortgage.
The length of a commercial mortgage is variable, from 3 years to 25 years. It can take a few weeks to go from the initial mortgage application, to the point at which the funds are available. If the borrower needs to complete the purchase of the property quickly, then a bridging loan can be arranged within a day or two and repaid when the commercial mortgage has been completed.
Interest rates on commercial mortgages are low, but there is no fixed rate. A risk manager assesses every loan and sets the interest rate according to their risk assessment. The lower the assessed risk, the lower the interest rate charged.
Most commercial mortgage lenders charge an arrangement fee, which is normally added to the total loan amount. Some lenders require a commitment fee, which is payable at the time of the mortgage application.
A valuer will visit the property to evaluate its value. They will write a 20-to-30-page report for the lender. The valuer’s fee, which can be around £500, is paid by the borrower.
There will also be legal fees for both the borrower and the lender. The borrower is required to pay both fees, which can be several hundred pounds.
If the property is buy-to-let, there will be 3% stamp duty to pay too.
Currently the borrower can claim tax relief on the mortgage interest payments at the rate that they normally pay income tax on. This will be capped at a 20% rate next year and eventually abolished.
How to apply for a commercial mortgage loan
The best way to apply for a commercial mortgage is through a broker. Ascot Mortgages has access to a wide range of deals and specialises in matching borrowers to the best commercial mortgage deals for their individual requirements.
Your first step in the commercial mortgage application process is to contact Ascot Mortgages