The commercial mortgage market may not be as familiar to some advisers as the residential mortgage market but it is important to understand the products available and how they differ to secure the right commercial mortgage for clients.
Getting the wrong commercial mortgage for a business, whether it’s a small to medium-sized firm or a ‘one man band’, could have huge implications for the company.
At its simplest, a commercial mortgage is a loan against a building which is used for commercial, as opposed to residential, purposes.
On its website, the National Association of Commercial Finance Brokers (NACFB) makes an important distinction between the types of commercial mortgages a business owner might apply for.
It states: “If you are looking for a mortgage to purchase premises for your business you will need a business mortgage or owner-occupier mortgage.
“If you already own your business premises and are looking to refinance the property you will need a business remortgage (or owner-occupier remortgage).”
The website continues: “If you are looking to invest in non-residential property to rent out to other businesses you will need a commercial investment mortgage.
“If you already own a commercial property for investment purposes and are looking to refinance it, you will need a commercial investment remortgage.”
Similarities and differences
Commercial mortgages bear some similarity to residential mortgages but there are some important differences for advisers and their clients to note.
Lee Tillcock, editor of business at Moneyfacts, explains: “Both are a loan secured on property, usually for substantial amounts of money and both will be repaid over a long period of time.
“Commercial mortgages are offered on a fixed or variable rate with the property against which the mortgage is being secured used directly by the business or, as with a residential buy-to-let mortgage, as an investment property that is to be let to other firms.”
According to the NACFB, commercial mortgages are usually repaid over a period of 15 years or more.
Where the two types of mortgage differ is the loan to value for a commercial mortgage is usually lower than for a residential mortgage, Mr Tillcock points out.
“While home buyers could borrow as much as 95 per cent of the value of their property, a business is more likely to get around 60-70 per cent,” he notes.
“Of course there are exceptions, depending on individual circumstances.”
Products on offer
Challenger bank Metro Bank is one of a number of providers of commercial mortgages on the high street.
Andy Hallett, head of commercial real estate finance at Metro Bank, explains among its range of commercial mortgages are commercial loans which are used to purchase commercial property, as well as portfolio buy-to-let mortgages, available on both a capital repayment and interest-only basis.