What is a commercial mortgage?

A commercial mortgage is a type of secured loan for businesses. You might use one to buy a property for your business, or raise funds for things like renovations, development or new equipment. A commercial mortgage can also be used to buy business premises to rent out.

When applying, you’ll need to choose between a fixed or variable interest rate. A fixed-rate mortgage gives you stable, predictable repayments, which can help with budgeting. On the other hand, a variable rate moves with the market, so your repayments could go up or down over time.

Some lenders offer flexible features like capital payment holidays where you’ll only pay the interest for a time, or the option to switch from a variable to a fixed rate later. If you’re buying a green property with a qualifying EPC (energy performance certificate) rating, you might even be eligible for a discounted rate through a green commercial mortgage.

Are you eligible for a commercial mortgage?

In addition to the usual affordability checks for any mortgage, there might be a few extra requirements to qualify for a commercial mortgage. Let’s look at the criteria from a couple of leading commercial mortgage providers to give you an idea of what they require:

  • First up, you’ll typically need to be 18 or over, and applying as a sole trader, partner or director who has the authority to borrow for the business.

  • If borrowing to buy a property, it needs to be for business use, and typically the mortgage is secured by a first legal charge on your business premises.

  • When it comes to the deposit, expect to put down around 25% or more of the property value for a commercial mortgage, although smaller deposits may be possible with some lenders.

  • When you apply for a commercial mortgage to buy a property, the lender will need to know why you need the premises as part of their eligibility assessment.

Every lender’s a bit different, so it’s very important to compare commercial mortgage products from different lenders to find the right fit for your situation.

What costs should I budget for when arranging a mortgage?

When applying for a mortgage, remember there are a few costs you’ll need to keep in mind to avoid any surprises:

  • Valuation fees: Lenders will want to know your property's value, so they'll arrange a valuation. Costs can vary, but it's wise to budget for this.​

  • Legal fees: Whether it's a solicitor or conveyancer, you'll need legal help to navigate the process.​ Legal fees for home buying are usually around £2,000 (including VAT at 20%), but the exact cost can vary depending on the property and how complex the work is.

  • Local searches: If you’re buying a property, your solicitor will also carry out local searches.

  • Arrangement fees: Usually lenders charge a fee to set up your mortgage.

  • Early repayment charges (ERCs): Planning to pay off your mortgage early? Be aware of potential ERCs, which can apply if you overpay beyond a certain limit.

  • Survey costs: If you're considering a detailed property survey, this will be an additional expense to keep in mind.​

By considering all of these costs, you can keep your mortgage process running smoothly without any unexpected financial bumps along the way.

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