Is it harder to get a commercial mortgage UK? Pros and Cons

When it comes to securing a commercial mortgage in the UK, there are several factors that can influence your ability to obtain one. From the size of the deposit to the type of lender you approach, understanding these key factors is essential in determining whether it’s harder to get a commercial mortgage in the UK or not.

Key Takeaways:

• Obtaining a commercial mortgage in the UK can be influenced by various factors.
• The size of the deposit and loan to value ratio play a significant role.
• There are different options for securing a commercial mortgage, including high-street banks, challenger banks, and niche lenders.
• Commercial mortgages offer stability and control over business premises, but also come with responsibilities for building maintenance.
• Comparing commercial mortgages to other forms of financing can help in making an informed decision.

What can commercial mortgages be used for?

Commercial mortgages serve various purposes depending on the nature of the business. Whether you’re an owner-occupier, a landlord, or a property investor, commercial mortgages offer flexible financing options for your specific needs.

Owner-occupied properties

If you’re currently renting premises for your business, a commercial mortgage can enable you to purchase the property and become an owner-occupier. This provides stability and long-term control over your business location.

Residential buy-to-let properties

Commercial mortgages can also be used to finance residential buy-to-let properties. This allows landlords to purchase residential properties and generate rental income through leasing them to tenants.

Commercial buy-to-let properties

For those interested in entering the commercial property market, commercial mortgages can be used to acquire commercial buy-to-let properties. These properties are then rented out to other businesses, creating a potential income stream for the property owner.

Commercial mortgages offer a versatile and effective way to finance a range of business property ventures. Whether you’re looking to own your own business premises, expand your rental property portfolio, or enter the commercial rental market, a commercial mortgage can provide the necessary funding to achieve your goals.

Understanding the contribution required for a commercial mortgage

When applying for a commercial mortgage, it’s important to understand the contribution you’ll need to make towards the total value of the property. Most mortgage providers will only offer up to 75% of the property’s value, which means you’ll be required to provide a deposit or contribution to cover the remaining percentage.

The size of the contribution is determined by the loan to value (LTV) ratio, which is calculated by dividing the loan amount by the property’s value. For example, if the property is valued at £500,000 and you’re seeking a loan of £400,000, the LTV ratio would be 80%, and you would need to provide a 20% contribution.

Additionally, it’s important to consider the impact of the contribution on your monthly repayments. As the loan amount decreases with a larger contribution, the monthly repayments will also be lower. These repayments will cover the principal loan amount, interest, and any charges accrued.

As shown in the table above, a larger deposit or contribution results in a lower LTV ratio and subsequently lower monthly repayments. It’s essential to consider your available funds and financial situation when determining the size of your contribution for a commercial mortgage.

Options for securing a commercial mortgage

When it comes to securing a commercial mortgage, you have several options to consider. Each option offers unique advantages and considerations to suit your specific situation. Here are the main types of lenders you can approach:

1. High-street Banks

High-street banks are well-established financial institutions that offer commercial mortgages. They often provide attractive rates, making them a popular choice for borrowers. However, it’s important to note that high-street banks have stricter criteria, which may make the application process more challenging.

2. Challenger Banks

Challenger banks are smaller, newer financial institutions that aim to provide more flexible lending options. While they may offer greater flexibility, it’s important to consider that they tend to have slightly higher interest rates compared to high-street banks. However, they can be a viable alternative for borrowers who may not meet the criteria of traditional lenders.

3. Niche Lenders

Niche lenders specialize in financing specific industries or types of businesses. They understand the unique needs and challenges of these sectors and offer tailored lending solutions. Niche lenders can be particularly beneficial for young or specialized businesses. However, it’s worth noting that they may have reduced borrowing percentages compared to other lenders.

When choosing a lender, it’s essential to carefully assess your business’s specific requirements and financial capabilities. Consider the interest rates, loan terms, and eligibility criteria offered by different lenders before making a decision.

Pros and cons of commercial mortgages

When considering financing options for your business premises, commercial mortgages offer both advantages and disadvantages. It’s important to weigh these pros and cons to make an informed decision that aligns with your business objectives and financial capabilities.

Advantages

• Stability and Control: By choosing a commercial mortgage, you have the stability and control that comes with owning your business premises. This eliminates the uncertainty of rent increases and allows you to make modifications according to your business needs.
• Potential for Subletting: Owning your premises gives you the flexibility to sublet the space to other businesses, generating additional income and potentially mitigating the costs of your mortgage.
• Tax-Deductible Interest: The interest you pay on your commercial mortgage is tax-deductible, which can provide significant savings for your business.
• Increased Equity: As you make repayments on your commercial mortgage, you build equity in your property. This can be beneficial for future financing or if you decide to sell the property.

Disadvantages

• Substantial Deposit: Commercial mortgages generally require a substantial deposit, typically around 25% of the property’s value. This can be a significant upfront cost for your business.
• Complications in Relocation: If your business needs to relocate, selling or transferring a commercial property can be more complex and time-consuming compared to vacating rented premises.
• Responsibility for Building Maintenance: As the owner of a commercial property, you are responsible for its maintenance and repair costs. This adds an additional financial and management burden to your business.

By carefully considering the pros and cons of commercial mortgages, you can make an informed decision that aligns with your business goals and financial capabilities.

Comparing commercial mortgages to other forms of financing

When considering financing options for your business, commercial mortgages are not the only choice available. Depending on your borrowing needs and specific circumstances, other forms of financing can offer distinct advantages and considerations. Here are some alternatives to commercial mortgages:

Business Loans

If you require smaller borrowing amounts or prefer a shorter repayment term, business loans can be a more cost-effective option. These loans are specifically designed for business purposes and can help fund various ventures, such as expansion or purchases of equipment or inventory.

Unsecured Loans

Unsecured loans do not require collateral, making them an attractive option for businesses that do not have substantial assets to offer as security. However, keep in mind that unsecured loans typically come with higher interest rates and may require a stronger credit history or financial standing.

Bridging Loans

For short-term financing needs with a defined repayment plan, bridging loans can be a viable choice. These loans bridge the financial gap between the purchase of a new property and the sale of an existing one. They are particularly useful for businesses looking for immediate funding during the transition.