Commercial finance can be taken out in many different forms. The most common, a commercial mortgage, is simply a loan secured on a property that isn’t your residence.
Buy to let mortgages would fall under this category but with their huge popularity, they’ve earned their own place in the mortgage market. Commercial mortgages are certainly more niche compared to residential and buy to let mortgages as they’re typically used for business purposes.
Commercial mortgages allow individuals and companies to raise finance to purchase (or remortgage) business premises. The borrower can then lease the building or run a business from the premises themselves.
You may need a semi-commercial mortgage for a residential property that’s part of commercial premises. For instance, a shop that had residential flats above, that you may occupy yourself or rent out to tenants.
Commercial finance is available in so many different variations that it’s best to talk to a commercial advisor who is experienced in this field. It would be near impossible to outline every type of scenario that would be suited to each commercial borrower.
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Owner-occupied commercial property is where you’d occupy the business premises yourself.
There are different types of mortgages relating to owner-occupier mortgages, with lenders looking at business plans for startups, or previous account history for already active businesses.
Lenders typically ask for 2-3 years’ account history for existing businesses or projected accounts for business startups.
Commercial buy to let mortgages
Commercial buy to let mortgages are where investors rent out their commercial premises to make a profit from rental income and any capital gains that may occur.
Lender rates on commercial investment mortgages are quite unique as they’ll normally assess each application on a case by case basis. This is to determine the mortgage rate that they’ll offer.
Commercial lenders will also assess the following:
- Your investment experience
- Deposit amount
- The type of business premises you’re buying
- Business use of the premises
If there’s already a tenant in place, the lender will also assess the quality of the lease and tenant. This is why it’s advised to speak to a qualified mortgage advisor, as they’ll contact a wide range of lenders and niche financial companies to determine the very best commercial mortgage on offer.
Commercial advisors can ensure your application has strength and can advise you if you’re using the right type of finance for your purchase.
Learn more: How to get a commercial buy to let mortgage
Portfolio mortgages are popular with modern buy to let landlords who have a number of properties. This is because a buy to let portfolio mortgage is seen as a single account across the entire portfolio as opposed to individual accounts for each property.
This ensures a single mortgage, with one monthly payment, no matter how big the portfolio is. This can simplify things for landlords as they know exactly where their finances are in terms of income and expenditure.
With a portfolio mortgage, you’re able to leverage any equity in your properties against further lending. This can allow you to buy more properties to add to your portfolio. The advantage of this is that your equity could fund an entire deposit, which in effect would grow your portfolio without dipping into your personal funds.
Read more: What is a portfolio mortgage?
Auction finance is another term for a bridging loan or ‘short-term’ finance.
Finance for auction can be very useful when speed is of the essence in getting a deal through to completion. Ensure you speak to an advisor to make sure you’re getting the best bridging loan and there aren’t any hidden fees.
If you require development finance then you will certainly require a specialist development lender. Be sure to carefully plan your application beforehand as it could be the difference between being approved or being declined. Our advisors specialise in development finance and know exactly what specialist development lenders look for.
Primarily, development finance lenders will look at the GDV (Gross Development Value) of the development in question. This will be the benchmark of what lenders will use to assess how much they’ll lend. Generally, lenders won’t exceed 65% of the GDV and will only consider lending more if you own the land outright.
Lenders will also consider other factors when assessing an application for this type of commercial finance. Lenders will assess the experience of the borrower, along with timelines and the proposed duration of the said development.
Mezzanine finance can be used where a developer needs to fill a financial gap. This may be because the lender hasn’t lent the maximum amount the developers applied for, or the developer may have underestimated costs, leaving a gap in finances.
This type of finance is used to fill financial gaps by assessing the borrower’s equity, the amount the main lender has approved and the outstanding financial gap. Furthermore, it’s normally secured by an additional lender placing a second charge on the property in question, as the initial lender would have already secured the first charge.
Mezzanine finance enables developers to remain in positive cash flow throughout the development, as funds can start to dry up pretty fast. Additional funds can also support further investments where cash reserves are depleted.
A land mortgage is used to buy a plot of land. If you require a mortgage on a piece of land, there are lenders that can offer you finance in this situation. This could be for a variety of uses, such as development, agricultural, equestrian and leisure.
There aren’t many lenders that offer finance without planning consent, so it’s important to ensure you have planning permission in place for the particular use of land. This makes obtaining land finance a lot easier.
Borrowers will generally require a deposit, however there are lenders that can offer 100% mortgages if there are other assets on which they can place security. Lenders make assessments on the experience of the borrower, use of the land, purchase price and the deposit amount.
Refurbishment finance is typically used by landlords or developers to renovate properties that are run down. The refurbishment loan is actually provided at two stages of the renovation. Part of the finance is released before the property has been refurbished and the remainder of the loan is released post refurbishment, after an inspection by the lender has been carried out.
Lenders assess the loan amount by considering the anticipated value of the property once it has been refurbished, along with the potential rental value. There are two types of refurbishment mortgages, a light refurbishment mortgage and a heavy refurbishment mortgage.
A light refurbishment mortgage is for properties that only require cosmetic works. A heavy refurbishment mortgage is where structural work is needed as part of the renovation, as well as planning permission or change of use.
If you have a house with say 2 or 3 tenancies then a standard buy to let mortgage is all you’ll need. If you have a fully licensed HMO with 5 or more tenancies, then you will require a specialist HMO mortgage as a standard buy to let mortgage wouldn’t suffice.
The majority of buy to let lenders don’t offer HMO mortgages. This is simply due to the volumes of HMO mortgages being a lot less than conventional buy to let mortgages. For this reason, commercial finance can be more expensive in terms of mortgage rates and fees as products are more scarce.
The right mortgage advisor can still find a great HMO mortgage deal for you and sometimes it doesn’t have to be in the form of commercial finance. If you’re an experienced landlord, then the chances of being approved for an HMO mortgage drastically improve.
As this is a more specialist type of mortgage, our experts can ensure you’re getting the most from your HMO mortgage.
Bridging loans are generally used by borrowers who are purchasing a property and require the additional finance to ‘bridge’ the gap between their current finances and the amount needed to pay for the newly bought property.
Bridging loans can be useful when you’re buying a property but are still awaiting proceeds from the sale of your old property. You can then take a bridging loan at a high-interest rate for a short period of time. They’re also useful for developers who may have purchased a property to sell on for a profit, but require funds until the property has sold.
Over the years, high street lenders have become more reluctant to approve loans with shorter terms. As a result, this has paved the way for an increase in private bridging lenders who are happy to offer this type of finance. Nonetheless, they often have high rates and large fees due to the type of finance offered.
Bridging loans are available from privately owned smaller companies as well as larger lenders who are FCA regulated. It’s recommended to speak to a lender who is FCA regulated, as bridging loans can be very risky. The FCA has voiced concerns that advisors who aren’t regulated, could be recommending bridging loans to clients when there are other more suitable financial options available.
Always do your research before taking a bridging loan, as they often have hefty hidden charges. FCA-regulated advisors are obliged to only recommend a bridge if it is appropriate for you and your particular circumstances. Our advisors are FCA regulated and can inform you whether or not a bridging loan is viable for you.
Speak to a commercial finance specialist
Commercial finance can come in many different shapes and sizes. To find the exact type of finance required, you’d need to speak to an advisor to understand your requirements. Our specialists can also advise on business loans in addition to an array of financial products for companies. A mortgage for a hotel, for instance, can involve a number of commercial products as opposed to a single commercial mortgage.
Commercial finance is not something that’s readily available as lenders will require a thorough assessment of the individual before approval. Your advisor can ensure that your application is as strong as it can be and can also target the right lender for you. This minimises the risk of being declined and loss of money in fees.