A commercial mortgage is a long-term loan used to purchase or develop property, but it can also be used for land purchases.
Can a commercial mortgage be used for residential property?
Commercial mortgages can be used for commercial or residential buildings, but a commercial mortgage for a residential building cannot be for the borrower’s main residence. For that, a standard residential mortgage is required.
A buy-to-let mortgage is a type of commercial mortgage used by landlords to purchase residential property that is rented to tenants.
Developers can use commercial mortgages to build new homes or to convert commercial property for residential use.
How much can you borrow?
Many banks will lend up to £25,000 without security, but commercial mortgages are normally for amounts above £25,000 and will require security which is normally the property being purchased or developed.
Although most lenders have a minimum amount for commercial mortgages, in theory, there is no upper amount. A loan is based on a percentage of the value of the property. This is known as the loan to value (LTV). A typical LTV rate is 70%; for example, if the property is worth £1m, then the maximum amount you can borrow at a 70% LTV rate is £700,000.
How long is the loan?
A commercial mortgage is for three years to 25 years. If you need a loan for a shorter period, consider applying for bridging finance whose loan period can be from 3 months to 3 years.
How much interest is paid on a commercial mortgage?
Interest rates on commercial mortgages vary but they are generally higher than residential mortgage rates. Lenders use risk accessors to look at each individual loan application. Loans that are accessed as a higher risk will have cost more interest.
Most commercial mortgages have a variable rate. Typically, a rate will be quoted as a percentage above the base or LIBOR rate. If this rate goes up or down, then the rate paid on the commercial mortgage will shadow it.
It is possible to find a fixed rate where the rate does not vary for a number of years.
What other fees are there?
As well as paying interest, there are several fees charged. These include an arrangement fee which is usually paid once the loan application is complete, though some lenders may charge an arrangement fee in advance.
The borrower is responsible for both their own and the lender’s legal fees.
A valuation fee is paid for a report that values the property. After a broker has found a loan offer, you may have to pay a broker’s fee.
You may also need to pay stamp duty. VAT is charged on commercial buildings, but if you are registered for VAT ,you can claim this back.
Where can I find out more?
For more details and advice about commercial mortgages, and to find a suitable lender, talk to Ascot Mortgages. We will discuss your financial requirements and can help with the administration of the loan application.