Commercial borrowing: what you need to know

Ever wondered how and why commercial mortgages work? Let’s take a closer look at the length and structure of a commercial mortgage in contrast to the type of mortgage borrowed by home-buyers. 

Residential mortgages are very common. In fact, most people in the UK will own a home at one point or another in their life, generally necessitating a mortgage with a bank or building society. And while commercial mortgages are not uncommon, not everyone will understand how they differ without a little explanation.

Did you know that commercial mortgage terms are much shorter?

Residential mortgages are commonly taken out over 25-30 years in the first instance. This allows individuals to spread the cost of a home over a period of time that makes repayments easily manageable.

Commercial mortgages differ in that they are typically offered to businesses and individuals over a much shorter term – typically 5-10 years. Commercial lenders offer “committed facilities” as they are known in the mortgage industry. In simple terms, this means that monthly loan repayments are calculated for a mortgage of, say, 5 years, based on longer mortgage terms of perhaps 25 years. The longer repayment profile means that the business is not stretched in cashflow terms and that lender’s debt service cover requirements can be met.

It is not unusual for borrowers to be unaware of the specifics of a commercial mortgage and the commitment periods entailed – something that can lead to an unpleasant surprise when the lender finally requests repayment for the outstanding sum!

However, while full payment may technically be due, it typically just means that it’s time to refinance with your lender – or with a different lender should you choose. Each time your commitment facility approaches the end you will need to revisit your financial arrangements and put new terms in place.

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The value of good advice

Depending on your circumstances, it can be hugely beneficial to get good advice as your commitment facility approaches as finding the right deal can save a significant sum over the next 5-10 year period. That’s where experts like those at Glenhawk come into their own.

There are a number of considerations to take into account when refinancing, but it is worth noting that the benefits of staying with the same lender can be greater than one might find in a residential mortgage. They may include reduced arrangement fees and may not require another valuation. Security and legal fees will also be unnecessary.

Whether you stay with the same lender or move to a new lender, it is always worth shopping around and asking lenders for the best possible terms. This is where getting solid advice and guidance can really benefit you.

Do you know how much money you need for a commercial mortgage?

Typically, lenders will be looking to lend up to 80% mortgages for commercial purposes. This means that you will need to bring 20% equity to the table.

What type of information do lenders need from an investor?

In order to gain a commercial mortgage, lenders will expect to see at least three years of individual and business tax returns and personal financial statements among other things. If you currently own a commercial property, details of your other investments should also be shared.

Are there any penalties I should know about?

As with any type of mortgage there are penalties that become due should you fail to make payments on time to your lender. It is also worth considering that many lenders charge for early settlement of a loan, otherwise known as a “pre-pay penalty”.