Commercial mortgages

A commercial mortgage is a loan secured against business premises or other property (e.g., a shop, pub, office block, agricultural land, etc.). Commercial mortgages operate very similarly to residential mortgages and almost always require a deposit covering a percentage of the property's price. Arrangements are usually long-term and can be interest only or repayment. They are used both by businesses wishing to expand their property ownership but without the available funds to do so and also by businesses wishing to release capital tied up in their property portfolio for other purposes.

The details

A commercial mortgage involves an agreement with a lender under which they provide a proportion of the cash you require to purchase or remortgage a property in return for future monthly payments. They operate as follows:

• The lender provides a percentage of the value of the property you are purchasing or remortgaging; your business provides the rest. Lenders usually provide up to 75% of the value, although some may go higher.
• Your business purchases or remortgages the property.
• Your business makes monthly repayments to the lender.
• The arrangement ceases after a fixed period of time, usually 15 to 30 years, or sooner if the mortgage is repaid early.

Monthly payments may be interest only or repayment based. Repayment mortgage payments are obviously higher than interest only ones, but at the end of the mortgage term there is no outstanding amount owing to the lender; with an interest only mortgage, the initial amount borrowed must be repaid in full at the end of the term (possibly through remortgaging the property). In either case, interest rates may be fixed or variable.

In addition, your business may also be liable for various other costs following agreement including arrangement fees, legal fees and survey costs.

Commercial mortgages are generally harder to arrange than residential ones. Lenders will want to ensure your business is able to meet the repayments which may mean going into detail over how your business operates, its anticipated cash-flow, expansion plans, etc. Additionally, the lender may require personal guarantees from the owners of the business.

Who provides commercial mortgages?

Commercial mortgages are provided by high street banks, commercial banks and specialist finance providers. Many businesses use independent mortgage brokers to negotiate on their behalf rather than going direct to potential lenders; you may have to pay a fee for this service or the broker's cost may be paid by the lender directly.

Who are commercial mortgages suitable for?

Businesses who already own or who are looking to purchase premises, either as a necessary asset of the business (e.g., hotels, pubs, shops etc.) or to provide a base (e.g., office, factory etc.) for day-to-day operations.

Advantages

• Commercial mortgages can be one of the cheapest forms of business funding
• Your business will have more predictable outgoings on premises, particularly with a long-term fixed rate commercial mortgage, as you won't be open to fluctuations in the short-term rental market and can therefore plan better
• Your business will control its premises and can therefore ensure its working environment is as suitable as possible

Disadvantages

• Your business will still have to find a substantial portion of the initial purchase price
• Your business may be affected negatively by long-term changes in property prices
• It will be more difficult to move your business in the future than if you were renting