What you need to know about applying for a commercial mortgage
If you’re applying for a commercial mortgage there are a few things to get in order before making an application.
Don’t worry, it’s not complicated. But there are some differences to applying for a residential mortgage that you need to be aware of.
Commercial mortgages are different from home loans because they’re only used for business premises. They can be used for residential property, but only if it’s for investment or a rental portfolio.
We’ve already looked at what a commercial mortgage can be used for. Here’s a link to that blog. One of the biggest differences is that applications are looked at more closely than a traditional home loan. This includes business performance and affordability rather than just your personal income.
Here, we’ve broken down what you’re likely to need before applying for a commercial mortgage…
1. Yours and any business partners’ details
Commercial mortgage lenders are like those who offer home loans. They need to understand who they are lending to.
There are a few items that you will need to show to lenders. This includes:
Proof of ID (passport or driving licence)
Proof of address
Personal financial information
Credit history details
CV or business experience summary
Lenderswill want to be reassured that you and any business partners can manage the business or property successfully. And that’s why they look at your business experience.
2. Details about your business
When it comes to property loans, this is the biggest difference between a home loan and a commercial mortgage. Lenders want to know about how your business is performing and how it has performed over the past few years.
If you’re a new business, then this is where your business plan comes into play. If you’re unsure about how to write a business plan,this handy guide from StartUp Donut is useful.
Lenders will usually ask for:
Business accounts (normally two to three years if established)
Recent management accounts
Business bank statements
Cash flow forecasts
Business plan (especially for new ventures)
3. Your property’s details
When you buy a home, a mortgage lender will consider your property’s value and its current condition. But when it comes commercial mortgages, lenders need a lot more detail from you.
You’ll need information such as:
Purchase price or property value
Property type and usage
Expected rental income (if investment property)
Lease details (if tenants are involved)
Location and condition
The lender will also arrange a professional valuation so they can make a well-informed decision.
4. Your deposit
Commercial mortgages usually require a larger deposit than residential ones. It’s quite common for lenders to require a deposit of around 25-40%.
You might be able to secure a property with a lower deposit, but it all depends on individualcircumstances. This includes the deal itself as well as how risky the lender considers you and your plans.
If you’re in a strong financial position, you’re likely to have more options available.
5. Affordability and your financial history
Remember that lendersare putting their money on the line. So, they will want to see that you’re able to keep up with repayments. That means they’ll look at:
Personal income (if guarantees are required)
Business profitability
Existing debts or borrowing
Projected income from the property
For investment properties, rental income often plays a key role in affordability calculations.
6. Personal guarantees
Many commercial lenders ask directors or owners to provide a personal guarantees. That is particularly the case for small businesses or limited companies.
This simply means you share responsibility for the loan if the business cannot repay it.
It sounds intimidating, but it’s very common. We will explain clearly what might be expected before you proceed.
7. Legal &professional documents
Once your application progresses, you’ll also need:
Solicitor details
Company documents (if applicable)
Lease agreements or tenancy contracts
Planning permission (if relevant)
Insurance arrangements
How a mortgage broker helps
Unlike residential home loans, commercial mortgage lenders go into much more detail before deciding whether to make you an offer.
That’s why having an experienced mortgage broker to help you is wise. We’ll be able to work out what you really need, so you don’t waste time approaching lenders who just won’t lend to your kind of business or portfolio.
We help you by:
Matching you with suitable lenders
Explaining requirements upfront
Packaging your application properly
Saving you time and unnecessary credit checks
Negotiating competitive terms
Having everything in place before making an application really can speed up your application. And speed is often the key to helping the success of your business.
What to do next
Applying for a commercial mortgage feels like a big step. But with the right guidance, it doesn’t have to be an enormous issue.
If you’d like to talk to our experienced commercial mortgage adviser, contact us today.
Commercial Mortgages are not usually regulated by the Financial Conduct Authority.
