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Affordability Criteria in Commercial Mortgages: A Clear Overview

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When applying for a commercial mortgage on behalf of your business, it’s important to understand how lenders evaluate commercial mortgage risk. Affordability assessments play a crucial role in this process. By discovering what you can borrow and what it’s going to cost, you can make informed decisions about your mortgage. Fortunately, our expert brokers can help you navigate the process and determine your borrowing capacity.

Commercial mortgages are specifically designed for business-related properties, such as office buildings, retail spaces, and industrial facilities. Unlike residential mortgages, their purpose is solely for commercial use. With the help of a commercial mortgage expert, you can determine how much you could borrow and secure financing for your business property.

In this article, we will explore how affordability criteria in commercial mortgages work. We’ll also answer some frequently asked questions to help you better understand the process. By the end of this article, you’ll have a better idea of what to expect when applying for a commercial mortgage. 

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Key Takeaways

  • Discover what you can borrow and what it will cost when applying for a commercial mortgage
  • Affordability assessments play a crucial role in evaluating commercial mortgage risk
  • Understanding the process can help you make informed decisions about your mortgage

Whether you’re looking to purchase a car garage, petrol station, hotel, nursery, or care home, our team has the expertise to help you secure the right commercial mortgage for your needs.

What is the Affordability Criteria in Commercial Mortgages

When businesses apply for a commercial mortgage, they need to know how much they can borrow and what it will cost. The answers to these questions depend on the affordability assessment carried out by the lender. This guide explains how affordability is calculated. However, commercial lending is determined on a case-by-case basis, and there isn’t a generic calculation to work out how much you can apply for.

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What Type of Commercial Property Are You Looking to Mortgage?

When looking to mortgage a commercial property, it is important to consider the type of property you are looking to invest in. The type of property can impact the amount you can borrow, the deposit you will need, and the additional costs and fees associated with the mortgage. The acceptable security for the mortgage will also depend on the type of property. Calculating the maximum commercial mortgage you can apply for also depends on factors, including the type of property, acceptable security, and lending criteria. Commercial investment mortgages, owner-occupied commercial mortgages, and semi-commercial mortgages are some of the types of commercial mortgages available. Affordability assessments are carried out on each type of commercial mortgage, and eligibility criteria vary from one lender to another.

Some common types of commercial properties include offices, hotels or guest houses, agricultural properties, professional properties such as solicitors or medical centres, nursing or care homes, and investment properties. The property value and whether it is owner-occupied or an investment property can also impact the affordability of the mortgage.

It is important to speak to a commercial mortgages expert to understand how your specific property type and circumstances will impact affordability. Bad credit and term length can also impact affordability.

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What is the Maximum I borrow for a commercial mortgage?

The amount you can borrow for a commercial mortgage varies depending on the lender and your business’s operating performance. Most mortgage providers use their own in-house calculations to determine the exact amount you can borrow. However, the assessment is typically based on your earnings before interest, tax, depreciation and amortisation (EBITDA). This figure shows that your business is profitable enough to cover the mortgage and interest payments.

Some lenders may offer bespoke deals based on your business’s profitability. If your business is not profitable enough to cover the mortgage payments, some lenders may allow you to declare other legal forms of income and factor them into their affordability assessments.

How is the affordability calculated for commercial investment mortgages?

The affordability of commercial investment mortgages is calculated differently from owner-occupier mortgages. Lenders may base the amount you can borrow on the forecast rental income. Some providers may expect the rental income to reach 190% coverage for commercial properties and 130% coverage for buy-to-let investments. However, specialist commercial mortgage lenders may accept anywhere between 110-125% rental coverage, though lending is usually capped at 65% of the property’s value.

How can I get a commercial mortgage quote?

Commercial mortgage calculators and online rates tables can provide a rough idea of the amount you could borrow. However, speaking to a commercial mortgage broker is a better option. Brokers will take your needs and circumstances into account and use them to generate a range of bespoke mortgage quotes for you. They know how every commercial lender calculates affordability and will factor this into the best quotes for you. Your broker will also ensure that you are matched with the mortgage lender who is best positioned to be generous with the amount you can borrow and the rates they will offer you.

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Speak to Our Commercial Mortgage Expert

When it comes to commercial mortgages, it’s crucial to work with an expert who understands your unique situation. Our team of mortgage brokers are experts in various mortgage subjects. Ask us a question, and we’ll connect you with the best expert to help.

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How much deposit do I need?

Commercial mortgage lenders typically require a deposit of 25-40% of the property’s value. This means that the highest loan to value (LTV) ratio you are likely to find is 75%. However, it may be possible to secure a higher LTV deal of up to 100% if you can provide additional security such as a property you own with enough equity.

The more deposit you can provide, the better your chances of securing the mortgage you want. A higher deposit will also increase your chances of getting a favourable interest rate.

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Consider the Costs and Fees

When securing a commercial mortgage, there are additional costs and fees that you should be aware of. These fees can add up and increase the overall cost of your mortgage. Here are some of the fees you may encounter:

  • Arrangement Fees: These fees are usually 1-2% of the loan amount for commercial mortgages up to £1 million. Smaller loans may come with higher arrangement fees.

  • Valuation Fees: Valuation reports for commercial mortgages can be more rigorous than for residential mortgages, and the exact amount payable will vary from lender to lender. Unlike with residential mortgages, some lenders won’t demand these fees upfront.

  • Broker Fees: Brokers usually charge 1% of the loan amount but be cautious of deals with high upfront broker fees. The commercial mortgage brokers we work with only charge on success and will refund any advance charges if they’re unable to arrange a commercial mortgage for you.

  • Legal Fees: Commercial borrowers usually have to pay for their own legal fees, as well as the lender’s. Around £500 per party is a typical amount for legal costs.

It’s important to factor in these costs when budgeting for a commercial mortgage. Make sure to get a breakdown of all the fees associated with your mortgage, so you can accurately calculate the total cost.

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I Have Bad Credit will This Affect Affordability?

Having bad credit can make it more challenging to get a commercial mortgage. It can limit the number of lenders willing to work with you, and some providers might not offer you their best deals unless you have a spotless credit rating. However, there are commercial lenders who specialise in bad credit customers and are willing to take into account the severity and age of the credit issue when assessing your mortgage application.

To offset the risk posed by your bad credit, you could offer extra security or personal guarantees from company directors. It’s essential to work with a broker who has experience in securing bad credit commercial mortgages to help you find the right lender for your circumstances.

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Does the term length impact affordability?

The term length of a commercial mortgage can impact the cost of your repayments, but it is not a factor that will be included in the lender’s affordability assessments. Commercial mortgages can vary from between three and 40-year terms, although most tend to fall into the 15-30 years bracket. The length of time you spread your mortgage payments over can have an impact on the overall cost as a shorter term means larger monthly payments but less interest overall, while a longer term means smaller payments but more interest accrued over time.

Which term length is right for you will depend on a number of factors, such as how much you and/or your business can afford to pay out each month. To help determine the right term length for your commercial mortgage, you can use a commercial mortgage calculator.

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The Factors Affect the Commercial Mortgage Affordability

In addition to the factors we’ve already discussed, there are a few other things that can impact your ability to qualify for a commercial mortgage. Here are some of the key considerations:

  • Industry experience: If you’re new to investing or starting a business, some lenders may require you to have experience in the relevant industry. This is especially true for high-risk sectors such as retail. In these cases, you may need to seek out a specialist lender.

  • Location: While there aren’t usually many location restrictions on commercial lending, loans in Northern Ireland can be difficult to transact. If you’re investing in this territory, it’s important to seek out specialist advice.

  • Property type: Some types of commercial properties, such as agricultural land and churches, may require a specialist lender. Rates and LTV will be calculated on a case-by-case basis.

It’s important to keep these factors in mind when applying for a commercial mortgage. By doing so, you can increase your chances of qualifying for the loan you need to achieve your business goals.

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Speak to Our Commercial Mortgages Expert

Given the complexity of calculating commercial mortgage affordability, it is crucial to seek professional advice before approaching a mortgage provider.

The best way to determine the amount you can borrow is to speak with a commercial mortgage broker. We have in-depth knowledge of how every business lender on the market calculates the amount customers can borrow. We can provide you with a bespoke range of quotes and help you choose the most favourable one.

Moreover, the right commercial mortgage lender can ensure that you receive the best interest rate and guide you through every step of the application process. 

If you have any quick questions, the team is always ready to assist you. We understand that everyone’s circumstances are different, so we are experts in commercial mortgages. You can ask us a question, and we will get back to help you.

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Frequently Asked Questions

What are the typical requirements for a deposit on a commercial mortgage?

Commercial mortgage lenders usually require a deposit of at least 25% of the property’s value. However, this can vary depending on the lender and the borrower’s financial situation. Some lenders may require a higher deposit, while others may offer more flexible deposit requirements.

What factors do commercial mortgage lenders consider when determining affordability?

Commercial mortgage lenders consider several factors when determining affordability, including the borrower’s credit history, income, debt-to-income ratio, and the property’s value and condition. The lender will also consider the borrower’s business plan and financial projections to ensure that the borrower will be able to afford the mortgage payments.

How are interest rates for commercial mortgages calculated?

Interest rates for commercial mortgages are usually based on the lender’s base rate plus a margin. The margin will depend on the borrower’s creditworthiness and the risk associated with the loan. Commercial mortgage lenders may also offer fixed or variable interest rates, which can affect the borrower’s monthly payments.

What are the different types of commercial mortgages available?

There are several types of commercial mortgages available, including owner-occupied mortgages, investment mortgages, and development finance. Owner-occupied mortgages are used for properties that the borrower will occupy, while investment mortgages are used for properties that will be rented out. Development finance is used for construction or renovation projects.

What are the maximum loan-to-value ratios for commercial mortgages?

The maximum loan-to-value ratio for commercial mortgages is usually 75% of the property’s value, although this can vary depending on the lender and the borrower’s financial situation. Some lenders may offer higher loan-to-value ratios, but this will usually come with higher interest rates and stricter requirements.

What documents and information are required for a commercial mortgage application?

Commercial mortgage lenders will usually require a range of documents and information, including proof of income, bank statements, tax returns, business plans and financial projections, and details of the property being purchased or refinanced. The lender may also conduct a credit check and request additional information as needed.

Eligibility Requirements for Commercial Mortgages

To obtain a commercial mortgage, you need to meet certain eligibility criteria. These criteria may vary depending on the lender and the type of property you want to purchase. In general, you will need to have a good credit score, a stable income, and a deposit to put down on the property. Some lenders may also require you to have a business plan or other documentation that shows the viability of your business.

Affordability Assessment for Commercial Mortgages

Lenders assess affordability for commercial mortgages by looking at your income, expenses, and other financial commitments. They will also consider the type of property you want to purchase and its potential rental income. The affordability assessment helps lenders determine how much you can borrow and what interest rate you will be offered.

Factors Considered in the Affordability Assessment

When assessing affordability for commercial mortgages, lenders consider a range of factors, including your income, expenses, credit score, and the type of property you want to purchase. They will also look at the potential rental income of the property, as well as any other financial commitments you have. The lender will use this information to determine how much you can borrow and what interest rate you will be offered.

Improving Your Chances of Passing the Affordability Test

To improve your chances of passing the affordability test for a commercial mortgage, you should ensure that you have a good credit score, a stable income, and a deposit to put down on the property. You should also have a solid business plan and be able to demonstrate the viability of your business. Additionally, you may want to consider seeking advice from a commercial mortgage broker, who can help you find the best deals and negotiate with lenders on your behalf.

Documentation Required for the Affordability Assessment

To support the affordability assessment for commercial mortgages, you will typically need to provide documentation such as your business plan, financial statements, tax returns, and bank statements. You may also need to provide details of any other financial commitments you have, such as outstanding loans or credit card debt.

Maximum Loan-to-Value Ratio for Commercial Mortgages

The maximum loan-to-value ratio (LTV) for commercial mortgages varies depending on the lender and the type of property you want to purchase. In general, lenders will offer a maximum LTV of around 75%, although this may vary depending on the circumstances. The LTV ratio is the amount of the loan compared to the value of the property. For example, if you want to purchase a property worth £100,000 and the lender offers an LTV of 75%, you would be able to borrow up to £75,000. However in some circumstances it may be possible to get 100% lending. 

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** The content provided in this page is correct at the time of writing. Mortgage and loan lender’s qualifying criteria and rules change frequently so speak to an adviser to confirm the most up to date rules and criteria. The content on the website is not specific advice to each reader, and does not constitute financial recommendations.