What is a commercial mortgage?
A commercial mortgage is a mortgage on a property other than a single-family residence. It includes loans secured by office, retail, industrial and multi-unit residential rental properties. The borrower is generally a company or business. The running business may be a partnership, limited company or incorporated.
Types of properties
There are a number of properties that can be classified as commercial properties.
- Pure residential = 1-4 units
- Pure residential = 5+ units (multi-family Homes)
- Residential Commercial Mixed
- Commercial Industrial – factories, industry park, distribution warehouse
- Commercial Investment Property
- Commercial Property Development
- Land Development
- Retail Complex – (strip malls)
- Residential real estate can be financed under a commercial mortgage if it is purchased as an investment property
Why choose a commercial mortgage?
- Commercial mortgages tend to offer better interest rates than regular business loans as these require property as collateral.
- If your property increases in value, your capital could also see an increase.
- You’ll be able to rent out the property to generate extra income.
Hiring a broker specialist can help you ensure that you are paired with the most suitable lender. This makes the application process a lot more manageable. A commercial mortgage application works similarly to taking out a regular mortgage for your Home:
- Complete and submit the Asset and Liability form (this form is usually available online)
- Complete the Commercial Mortgage Application form
- Provide information on your business (such as property value)
- Legal due diligence will be carried out by the lender’s solicitors
- Receive a mortgage offer by the bank when your application is approved
It’s a good idea to collect the necessary documents ahead of time so you can complete the application efficiently and it is processed in great speed.
To do this, you should be able to provide:
- Bank statements covering at least the last 3 months
- Trading figures covering at least the last 3 years
- Proof of identity and address
- Lease and/or tenancy agreements
You may have to provide a business plan for financial projections – this could help the lender determine how likely you are able to pay off the loan.
Interest rate on a commercial mortgage
Unlike residential mortgages, lenders will not have advertised or posted rates. HomeHow will discuss your situation with a few available lenders eventually matching you with one that offers the best deals.
Loan to value ratio
Depending on the type of properties, lenders will usually approve a maximum of 78-80% of the property value.
What fees are involved?
Appraisal Fees: An appraiser will visit the property and write a report to the lender.
Legal Fees: Ask Chris
Broker fees: A broker gives you advice specific to your situation. A real estate agent presents your case to lenders. Their service is usually charged at up to 1% of the loan value.
Others : Ask Chris
- Lenders will approve your commercial mortgage based on:
- Shareholder’s credit profiles
- The cash flow and any debts you may owe to assess the financial health of your company
- Your businesses’ projected income to determine whether you can cover the cost of the loan
- Rental income may also be taken into account as this will have an affect on your business’ cash flow
- General income, credit and assets
- Contact HomeHow. We will discuss in detail your circumstances and what you will need in the future
- We will review your circumstances and complete a credit check. To do so, we’ll need various documents from you including ID and proof of income. (see document checklist here)
- After everything is reviewed, we will match you with a lender. At the same time, an appraisal of the property will take place
- Once we receive an approval from the lender, we will instruct your solicitor
- Your solicitor will receive the legal documentation
- Once all the papers have been sent back, our solicitor will complete the Report on Title.
- At this stage our underwriter team will complete a full review of the file in preparation for funding
- HomeHow will transfer the funds to your solicitor
- You’re good to go!
Commercial mortgages usually take much longer than residential mortgages. It could take anywhere from 60 days up to a year depending on the complexity of the deal.
Ready to dive into a commercial mortgage? Please connect with us as we will guide you step by step through the entire process.