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Commercial Mortgages

Commercial mortgages can serve a number of purposes, but the defining aspect is that the property being mortgaged is for business use, in whole or in part.

A company may invest in premises to trade from it. Alternatively, a landlord may invest in a commercial building to let it out and generate income from the rent.

If the building in question is only partially used for business purposes, but also contains a residential element, this would be regarded as a semi-commercial mortgage.

Examples of commercial property

Commercial property:

  • Warehouses
  • Offices
  • Shops
  • Restaurants
  • Garages
  • Leisure centres
  • Hotels

The commercial mortgage market place

In recent years, there has been growth in the commercial mortgage market, both in terms of volume of business and also the number of lenders.

There have been changes in the taxation of buy to let property, which do not apply to commercial property, as a result investment in them may offer an attractive opportunity for some investors.

There are both traditional high street and challenger banks’ lending in the commercial mortgage space. Challenger banks tend to offer more niche products with areas of criteria not catered to on the high street.

Lender criteria

If you are investing in a commercial or semi-commercial building the following aspects of criteria apply:

  • Loan to value borrow up to 75% of the property value (dentist and doctor’s premises up to 100% LTV);
  • Repayments: interest only or capital repayment;
  • Property type: all considered;
  • Adverse credit: some lenders offer flexibility on historical credit issues;
  • Landlord experience: not essential with some lenders;
  • Owner-occupied lending: accepted
  • Residential element: where part of the property is residential, the owner may occupy up to 40%

Commercial and semi-commercial mortgage rates

The nature of commercial property can be very diverse and consequently, mortgage interest rates are not standard, rather they are assessed on their own merits by the lender.

There are a number of factors that a lender will take into account, when assessing the commercial mortgage rate they will apply. These include:

  • the size of the loan;
  • the applicant’s credit history;
  • the loan to value for the mortgage (i.e. how much deposit will the borrower put down, as a percentage of the property value);
  • the financial status of the business, if the premises are owner-occupied;
  • the type of tenant (if the owner intends to lease the premises). This is important in helping the lender to establish whether or not a tenant may default on rent;
  • the length of any lease.

As a general rule of thumb, a semi-commercial mortgage – with greater diversity around income sourcing, will have a lower interest rate than a commercial mortgage.

Costs to consider

As with all property transactions, there are a number of associated costs an investor needs to be aware of. These may include:

  1. Purchase price or lease premium
  2. Stamp Duty Land Tax
  3. Land registry fees
  4. Surveyor costs
  5. Estate agent fees
  6. Legal fees
  7. Insurance
  8. Leaseholds only: rent pre-payment
  9. VAT (may or may not be applicable)

Where there is any uncertainty over any aspect of associated tax costs for a commercial or semi-commercial property purchase, it is recommended that the investor speaks with a tax specialist.

The commercial mortgage market gives a property investor the opportunity to diversify their portfolio, with potential rental income and capital growth.

It is a growing market and as with buy to let products, there is a wide variety of choice.

Page information supplied by Commercial Trust Ltd -

Commercial Trust Ltd

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