A guide to commercial mortgages – what you need to know

Most people are familiar with residential property investment, but there’s another world that has a lot to offer – and not just for business owners looking to avoid rent increases and management fees. There has been increasing interest in commercial real estate over the past couple of years, particularly as the residential rental market becomes more regulated.

As with all types of finance, commercial mortgages come with their quirks. If you’re keen to get into the commercial game, this guide will help you understand the ins and outs of commercial mortgages.

Commercial mortgages – the basics

When you take out a commercial mortgage (also sometimes referred to as a business mortgage), you’re borrowing money to buy property or land for commercial purposes.

While commercial mortgages are most commonly used by business owners who want to own the premises where they trade, they can also be used by investors who want to buy a property to lease to another business or a residential property owner who wants to buy multiple properties and rent to tenants.

Spot the difference – commercial, business, residential

The main differences between the three loan options are in how they’re used. A residential mortgage is for buying a home, a business loan is to start up or purchase an existing business and a commercial mortgage is used for buying business property.

When applying for a home loan a 10% deposit can sometimes be enough, but commercial mortgage lenders usually want 35% of the property’s value. This might mean you need to take out a separate home loan if you own a residential property to cover the cost of the deposit, further increasing your financial commitments.

Banks generally lend up to 65% of the value or purchase price of a commercial property. It is possible to get an additional loan towards the commercial property by offering the bank other assets in security, such as your home or investment property. Banks generally lend up to 80% of the value of the home (owner-occupied property) being offered as security.

Here are some of a commercial mortgage’s key features:

• Commercial mortgage repayments are always principal and interest, you can not have interest only payments.

• You’ll typically pay a higher interest rate on commercial mortgages compared to home mortgages. (Commercial rates are typically 2% higher than home loan rates) as they’re considered a higher risk to lenders.

• A commercial mortgage generally has a lower interest rate than a standard business loan as the mortgage is secured against the property.

• Commercial mortgage terms are mostly between 10 and 15 years, much shorter than the 25-30 years available for residential home loans.

Think before you apply

Taking out a commercial mortgage is a big, complex decision and as with all big financial moves, there are some things you should consider:

• Can you afford the monthly repayments? Remember to factor in any existing loan repayments you have when working out what you can repay each month.

• Are you a new business? Without a strong credit or trading history, lenders will view you as more high-risk than an established business.

• Do you have enough for the deposit? Unlike residential property loans where a deposit is 10-20% of the price, commercial loans typically require a deposit twice that – 35%.

• Are you ok using the property as security? For a secured loan, lenders will require the property to be used as security for the loan so if you default, you’ll likely lose ownership of your real estate.

• How strong are your tenants? If you are buying a commercial property to lease out to other businesses, it pays to check that your tenant will be in a capacity to pay the rent if there are lockdowns due to Covid-19. Tenants typically in the food, hospitality or tourism business have been more affected by Covid-19.

A quick summary of the application process

A commercial mortgage application is very similar to the residential home loan process:

1. Fill out an online application form for a commercial mortgage.

2. Submit information about your business or expected rent (any potential lease agreements you have signed with the tenants).

3. Get a property valuation on the premises you wish to buy.

4. Wait for the lender to carry out all the necessary paperwork and legal checks.

5. Receive a formal mortgage offer from your bank, once approved.

Additional paperwork

To qualify for a commercial mortgage, you’ll need to pass the lender’s eligibility checks which usually include:

• General income, debts, cash flow, assets: the financial health of your business (credit check)

• Projected income (forecasting): whether you can cover the cost of the loan

• Proven profitability: at least three months of business or personal bank account statements

Financing your commercial investment – work with a broker

Commercial loans require a higher deposit, often come with a higher interest rate and have shorter repayment terms. But investing in commercial property can be a great way to diversify your investment portfolio or expand your business. To ensure your success, the smartest strategy is to work with a commercial mortgage broker. You’ll get advice and assistance that’s specific to buying commercial property, plus you’ll gain access to a pool of lenders that specialise in commercial investment property loans.

For further expert advice on applying for a commercial loan, call the team at Global Finance today. We would love to help!

**These are general guidelines and are by no means a reflection of bank or lending policies