There are many similarities between a residential and commercial mortgage. Both are a loan secured on property, usually for substantial amounts of money. Both will be repaid over a long period of time.
Neither is entered into lightly as both are a long-term financial commitment. However, for most people a mortgage represents the only way into property ownership, whether as a home or a business investment.
Types of commercial mortgage
In the same way that a home buyer is presented with a number of mortgage choices, so too is the purchaser of business premises.
Whether to go for a fixed rate or a variable rate is a major decision. One offers guaranteed payment amounts, of both interest and capital, for a specified number of years. The other involves more risk, as the lender will either benefit or lose out from rate changes.
A business mortgage can be a way of raising funds to purchase a new property or of using an existing asset to fund additional investment. Alternatively, it could be a remortgage, replacing a current arrangement.
The property against which the mortgage is being secured may be used directly by the business or, as with a residential buy-to-let mortgage, it could be an investment property that is to be let to other firms.
Steps required to secure a commercial mortgage
In the same way that a home buyer must convince a lender that they will be able to repay their debt, a business must also demonstrate their capability to keep up with repayments.
The loan to value (LTV) for a commercial mortgage is usually lower than that for a residential loan. While home buyers could borrow as much as 90% of the value of their property, a business is more likely to get around 75%. Of course there are exceptions, depending on individual circumstances.
The lender will want to see a significant amount of financial information about the business before agreeing to lend. Three years of published accounts are typically required, along with information about the background of both the firm and its owners.