Commercial mortgages simply said, are loans taken to start a business on a property that potentially has commercial value. If you intend on starting a business by purchasing an already constructed property or using a purchased property as a rental to generate an income, then a commercial mortgage can help you with these business ventures.

In the UK, these types of mortgages are typically offered by banks and specialist lenders.

Unlike a residential mortgage, commercial mortgages do have some differences and they may take a bit more paperwork before being approved. 

As part of establishing and running a business, a place to operate and carry out day-to-day operational activity in a premises is essential. Although not restricted to this list, here are some businesses that can benefit from the purchase of commercial property by using a commercial mortgage.

Medical and healthcare: If you’re in the healthcare sector that offers specialised medical services and patient care, you may consider purchasing a commercially viable property located close to a city or town where it is easily accessible.

Retail shop facilities: Retail shopping is usually carried out within shopping malls, shopping centres and other types of general or specialised storefronts. Commercial mortgages can be particularly helpful when securing a customer-oriented business such as a retail space.

Office space: Purchasing a property and renting it out as office space can turn out to be a very lucrative and stable way of generating income. This could be anything from admin workspaces to business meeting places. Many professionals are on the lookout for a place they can operate conveniently. Commercial mortgages can prove to be an asset when looking to establish a business such as this.

Mixed development projects: Multiple uses of a property and its premises can bring in better business opportunities. Purchasing a property that can function as a residential complex as well as a commercial enterprise, is a good method of generating income on different levels.

Entertainment and leisure: In the UK restaurants are a growing industry. Investing in ventures such as this can prove to be a true winner. However initial investments could prove to be on the high side, which is why many entrepreneurs will find commercial mortgages as a welcome step of assistance.

While there are many types and variations of commercial mortgages in the UK, listed here are some of the more popular ones with a short description and how you may find them useful when setting up a business venture.

Development Finance

Just like the term implies, development finance is usually funding obtained from a lender to carry out to construct, renovate or even refurbish a property. Although not strictly tied down to commercial development, it is mostly utilised to develop a business entity property. Development finance can help with the construction and related costs of development projects such as a renovation or a new build.

In most development loan projects, the lender may adopt a monitoring process that oversees the progress of the project and monies released in tranches upon completion during various stages of the build or renovation.

The term of development loans may differ from lender to lender, but typically they could be anything from 6 months up to a period of 2 years. Like all other types of loans, a development loan consists of capital as well as interest components, however, it may be noteworthy to understand that the borrower isn’t required to carry out monthly payments to the lender. Instead, once the development project has achieved completion, the borrower will have to settle the capital and interest in its entirety.

Bridging Finance

These are short-term loans. Also known as bridging loans, these are typically used to “bridge” a financial gap. Bridging finance is particularly useful if you need to make a time-sensitive purchase but have to wait until your own funds or maybe a mortgage becomes available. Bridging loans is a popular way of completing a much-needed project in a hurry. These types of loans are mostly used for properties that need to be bought quickly or maybe even as an auction purchase.

Bridging finances are secured loans. What this means is that you as a borrower will have to keep collateral such as your home, to obtain this loan. Bridging finance can act as a great source of financial assistance at a critical time of need.

Semi-Commercial Property Finance

Semi-commercial mortgages are specifically designed for properties that combine residential and commercial usage. Some examples of these properties are homes with a combination of shops or offices.

While semi-commercial mortgages offer flexible terms and higher loan-to-value ratios compared to standard residential mortgages, they come with higher interest rates. Semi-commercial mortgages do have stricter lending criteria and potentially higher interest rates. To qualify for a semi-commercial mortgage, you will need to show proof of a strong credit history, stable income, and a detailed business plan.

Large HMO Finance

Large HMO (House in Multiple Occupations) finance is a specialised type of mortgage designed for property investors looking to purchase or refinance large HMO properties.

HMO finances often require a larger deposit and usually have stricter lending criteria due to the increased risk associated with HMOs. Lenders assess factors such as rental income potential, property management, and tenant history. Speak to a specialist mortgage broker before deciding on your investment and mortgage to secure the best possible deal.

Large Property Investor Portfolio Finance

Large property investor portfolio finance appeals to entrepreneurs as a lending solution, particularly for experienced investors with an extensive property portfolio.

These mortgages allow investors to consolidate existing loans, raise capital for future investments, or refinance existing debt. Lenders typically assess the investor's financial strength, property portfolio performance, and future plans. In order to qualify, investors must demonstrate a strong track record of property investment and a robust financial profile.

Complex BTL Structure Finance

Complex BTL mortgages are specific and are a specialised lending solution for experienced property investors with complicated property portfolios. It is not unusual for these types of finances to be tailored in order to fit complex scenarios involving multiple properties.

Here are some key features of complex BTL structure finance:

• Tailor-made solutions: Lenders are able to offer flexible financing options in order to accommodate diverse investments and strategies that work for better revenue generation.
• Higher Loan-to-Value (LTV) ratios: These mortgages often allow for higher LTV ratios compared to standard buy-to-let mortgages.
• Complex property structures: Lenders can finance properties with complex structures, such as multi-unit properties, mixed-use developments, or properties with multiple owners.
• Specialist expertise: Lenders with expertise in complex finance can help guide with regard to intricate legal and financial arrangements.

MUFB (Multi-unit Freehold Blocks) Finance

What is a Multi-Unit Freehold Block (MUFB)? This is a property divided into multiple self-contained units. These types of properties come under a single freehold title. Unlike leasehold flats, the property owner has full ownership of both the land and the building. In comparison to HMO where occupants usually have to share a kitchen and bathroom with other occupants, MUFB ideally would have its own living area, including a kitchen, living room and bathrooms, while common areas such as hallways are shared with other residents.

Each tenant will also have an individual AST (Assured Shorthold Tenancy) agreement. An AST is basically a contractual agreement between a landlord and a tenant for a rented property. It is a common form of tenancy agreement in the UK and is mostly applicable to new tenancies.

Apartment buildings, flats or even converted housing are examples of MUFBs in the UK. As in all forms of mortgages, lenders will assess your business capacity and capability based on the usual criteria of a mortgage such as age, credit score, income, and amount of deposit.

The nature of your business venture is most likely to determine what type of commercial mortgage you will be applying for. The commercial intention and its mode of operational or location-based advantages are common factors that most businesses will consider before deciding on which property to purchase. As described above, there are many options of commercial mortgages to choose from.

Here are more factors that could help narrow down your decision when applying for a commercial mortgage.

Research: Carry out your own research on the commercial mortgage market. Many lenders offer a variety of financial solutions and facilities that even offer tailor-made mortgages that suit your particular requirements. Doing your own research will certainly help you establish your business in a property that will help elevate your business efforts.

Mortgage term: As in any mortgage, speak to your mortgage broker about how long the term will be and how the final payment will be carried out. The longer the term, the repayment rate will be lesser. However, this could result in you paying a higher amount than if you agreed to a shorter period with a slightly higher instalment repayment scheme.

Interest rates: In the UK mortgage rates are usually offered as fixed, and standard variable (SVR) formats. Each of these mortgage types has their own pluses and minuses. Speak to a professional mortgage adviser to get a better understanding on how these mortgages work and what could benefit you in the long run. Interest rates will play a crucial role in how you manage your mortgage until your final repayment is done.

Negotiate: Purchasing or renting out, your skills in negotiating for a better deal will prove to be profitable. Being able to get a good deal with the seller or landlord will help you with some savings that can be put aside to pay the monthly mortgage instalments.    

LTV for a Commercial Mortgage

Commercial mortgages are scrutinised carefully to ascertain their creditworthiness and capability to repay their loan. LTV or Loan-to-value ratio is how a lender will compare the loan to the value of the property being purchased. While each lender may have their own method and flexibility, LTV allows the lender to know how much equity you have in the property and how much the borrower needs to place as a deposit to obtain the mortgage.

Prior to applying for a commercial mortgage, speak to a mortgage broker about how much LTV will help with getting the loan approved.

Commercial mortgage advice is offered as part of Commercial Finance Brokers UK Ltd. Openwork Limited accept no responsibility for this aspect of our business.