If you are considering buying a commercial property as an investment with the intention of renting it out to tenants then it is possible that you may require a commercial mortgage to help complete the purchase. In this respect, we trust that you find this guide to commercial mortgages to buying commercial buy to let properties of benefit.
Who provides such finance?
There are many providers, such as the major high street banks and building societies as well as a number of specialist commercial lenders. With so many lending institutions, you will want to try to obtain the best deal possible. There are a number of ways that you can attempt to do this. You could speak to your own bank where you maintain your business account but do bear in mind that they will only offer you their own commercial lending products. You could go on the Internet and spend a considerable amount of time, that may have been better spent in running you business, trying to source a suitable lender.
Another option is to contact an experienced commercial mortgage intermediary or broker as they will have access to numerous lenders. Intermediaries and brokers make it their business to be in touch with a wide range of lenders and up to date with the current offers and rates available.
What can the funds be used for?
This type of mortgage is specifically to be used to help a business purchase a commercial property that is to be let out to tenants by the business owner. The sort of properties could include: –
- Industrial units on trading estates such as warehouses
How much are you allowed to borrow?
This may vary between lenders but could range from £25,000 to £10 million plus.
Typically, the term may range from between 2 to 25 years but this is subject to variation in some situations.
What security is required?
The lender will require a first legal mortgage over the commercial premises that you wish to buy and let out with a good security margin to reduce their risk. Therefore the maximum Loan to Valuation (LTV) is likely to be in the region of 75%. The business will be expected to provide the balance of the funds required to complete the purchase from its own resources.
Other security may be requested by the lender such as personal guarantees from the directors and business owners.
What is the interest rate?
The interest rate may vary between lenders and is subject to individual negotiation between the lender and the customer. The greater the perceived risk to the lender, then the higher the rate of interest.
There is usually a choice of interest rate types. For instance, if you prefer the comfort of knowing how much you will be paying each month then you may choose a fixed rate over a number of years. If you think that interest rates may reduce at some point in the not too distant future you may prefer a variable rate of interest that is linked either to the Base Rate or LIBOR. Of course, with variable rates, if the base rate rises then so will your repayments.
How do you pay the commercial mortgage back?
It is normally repayable monthly on a capital and interest repayment basis over the term of the mortgage. The monthly repayment amount is usually deducted automatically from your business current account with your bank by direct debit or standing order. In some cases, it may be possible to have the borrowing structured on an interest only basis for a period of time and then switch to capital and interest.
It may be possible to make lump sum reductions but you should check that there are no penalties for doing so.
Obviously, the sooner that you can repay the borrowing the less interest you will end up paying.
Do you have to pay any fees?
Yes, there are a number of fees that you may have to pay.
Arrangement fee – the lender will no doubt charge you a fee for assessing and processing your commercial mortgage application. In some cases, you may be asked to pay part of this up front as a non-refundable commitment fee with the balance of the arrangement fee being taken upon drawdown of the borrowing.
Security fee – The customer is responsible for paying the legal fees for both parties that relate to the lender arranging the security.
Valuation fee – A comprehensive valuation will be required by the lender for which the customer is responsible for paying.
Brokers fee – This fee is to cover the cost of the work involved in both helping source a suitable lender and process the application.
Early repayment charges – These may apply, for instance, if you wish to make a partial or full repayment of the commercial mortgage before the end of the term of the borrowing.
What supporting documents may be required when applying?
The prospective lender may ask you to provide things like:
- Business plan
- 6/12 months business bank statements.
- The last three years audited accounts.
- Up to date management accounts.
- Projected profit and loss account/balance sheet.
- Cash flow forecast.
When assessing the application, the lender will normally expect the business to be able to fund the commercial mortgage repayments without taking into account any rental income that you may be expecting to receive on the property that is going to be purchased and then let out to one or more tenants.
We hope that you have found the above information of benefit in relation to sourcing and applying for a commercial mortgage for the purchase of a commercial buy to let property.
Article Courtesy of Andy Biggs, Commercial Mortgage Link