Business Mortgages Explained

Business mortgages are loans from banks and specialist lenders for entrepreneurs buying commercial property. Many of the largest business mortgage lenders are common names on the high street, but specialist lenders who rely on mortgage brokers to introduce customers also have a large share of the market.

What is business property?

Each commercial lender has lending rules, and many only finance specific business sectors; like shops, pubs or care homes. Business mortgages are available for any property that is not a home.

Buy to let falls between business and residential lending. Some lenders treat property investment as commercial borrowing, while others apply residential lending rules.

Making a business mortgage application

Although banks, finance houses and building societies apply similar criteria before agreeing to lend:

  • Security - Business mortgages come at a lower loan-to-value than those for homes. Many lenders restrict funding to 60% of a property's value.
  • Risk - Lenders will weigh up the risk of lending – for instance, a start-up is riskier than a well-established firm with a record of making profits.
  • Personality - Business experience and personal attributes of the owners often make or break a commercial mortgage deal. The lender must believe the owners have the qualifications and ability to make the money that will repay the loan.

A business mortgage application should include property details and an estimated value; business cash flow projections plus any evidence of past trading; and profiles of the owners and other key personnel.

The cost of commercial borrowing

Most individuals can borrow to buy a home cheaper than they can borrow the same amount of money for a business mortgage.

For example, commercial lenders quote rates as 'base rate plus 4%' or more.  That means the interest rate is variable and is set against the lender's own interest rate plus 4%. If the base rate is 5%, then the rate is 9%.
Some lenders price business mortgages against LIBOR rates. That's the 'London Inter Bank Offer Rate', which is the rate banks lend to each other. LIBOR rates are often set quarterly and are generally lower than other bank rates.

Business mortgages are repaid over a shorter term than home loans; expect a term of 5 -15 years. Commercial lenders will also charge higher fees to arrange a loan that can add 1% or more to the amount borrowed.

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