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Commercial Property Finance: Everything You Need to Know

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Why Invest in Commercial Property?

Investing in commercial property can provide a higher return on investment compared to residential properties. This is due to a few factors, including longer lease terms and the potential for multiple tenants in one property, such as offices or industrial units. A commercial property can be defined as one from which you make a profit, either from capital gains or rental. This covers everything from buying or renting out a garage, purchasing an apartment or buying a new premises for your business. What you will require is a commercial mortgage and that is probably the hardest part. Commercial property investment can be a great addition to a property portfolio, as it provides diversification and can act as a hedge against inflation.

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How Does Commercial Property Finance Work?

When purchasing a commercial property, most business owners will require additional funding as they do not have enough cash in reserve. Unlike residential mortgages, commercial mortgages require a significantly higher deposit from the lender. For owner-occupied commercial properties, businesses can usually borrow up to 75% of the property’s value, and for buy-to-let mortgages, the amount of property finance available is determined by the estimated rental income receivable.

Commercial property finance plays a crucial role in the real estate market, enabling investors to acquire and expand their property portfolios. Monthly payments can last up to 30 years, which is longer than a business loan, but shorter-term options are also available through property development finance and bridging loans.

When arranging commercial property finance, there are several costs to consider, including arrangement fees, valuation fees, and legal fees. The loan to value (LTV) ratio is also an essential factor to consider, as it affects the interest rate and monthly repayments.

Overall, commercial property finance provides businesses with the flexibility they need to purchase or refinance commercial properties. With interest-only and capital repayment options available, businesses can choose the best repayment option that suits their needs.

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What are Property Development Loans?

If you are constructing a property from scratch, a property development loan could be a suitable option for you. These loans are typically used during the build stage of the project and are released throughout the construction process as key milestones are reached. This helps to keep contractors motivated to finish the build as quickly as possible. However, it’s important to note that property development loans are not suitable for businesses looking to renovate or expand their premises unless it is a new build.

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What is a typical property development loan process?

To apply for a property development loan, you need to select a lender, which can be done via a broker or lending platform. Using a lending platform has an advantage as all lenders are regulated by the financial conduct authority. After providing necessary details, including the value of the property, development plans, and an exit strategy, the lender will provide you with finance-related information and quotes. It’s important to shop around as different lenders have varying interest rates that will apply to your commercial investment. The advantage of using a lending platform is that you will be matched with the lender offering the best rates and terms specific to your business needs. The loan process involves due diligence, financial forecasts, and credit history checks. Eligibility criteria and professional advice are also important factors to consider.

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What is a Bridging Loan?

A bridging loan is a short-term loan that can be used to cover the purchase of a new property when the selling and buying dates don’t match up. It is also useful when buying at auction and you don’t have access to funds by the time the auction comes around. Bridging loans provide quick access to funds, allowing you to secure the purchase of a new property before selling the current one. These loans are a type of bridging finance and can be an effective financial solution for property investors.

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How do bridging loans work in the UK?

If you require short-term funding for property acquisitions in the UK, a bridging loan allows you to borrow between £50k to £10m, secured on the property or multiple properties. The loan to value ratio is typically capped at 75%, with interest included. Unlike a property mortgage, a bridging loan is not linked to your income and is repaid in a shorter timeframe. This type of loan is useful when you need to purchase a new property before selling an existing one or securing long-term financing. Bridging loans are flexible and have quick processing times.

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Do I Need to Set Up a Limited Company to Purchase a Property?

If you are considering purchasing a property, you may be wondering whether you should set up a limited company to do so. While there are benefits to using a limited company, it is important to consider a few factors before making a decision. Here are some things to keep in mind:

Fixed Rate vs. Variable Rate

When choosing a mortgage, you will have the option of a fixed rate or variable rate. A fixed rate mortgage will ensure that your monthly payments do not increase, while a variable rate may change over time. It is important to consider how much equity you will build up in the property and how quickly you will be able to do so.

Stamp Duty

Stamp duty land tax is payable on properties that cost £150,000 or more. The amount your business pays is a percentage of the purchase price of the property. It is important to consult with your accountant to determine your tax liabilities.

Interest Rates

Commercial mortgage interest rates can be fixed against the base rate. Additionally, lenders may require a cash deposit or additional security. It is important to compare rates and requirements from different lenders to find the best deal for your business.

Renting Part of Your Premises

Renting part of your property can be a viable option to help with your monthly mortgage repayments. However, it is important to speak with a business finance expert to explore this option and determine whether it is suitable for you.

When purchasing a property through a limited company, you may be able to retain profits within the company and use this income to fund separate purchases without paying income tax. However, income tax will be payable once you draw the profits out of the company. If you are planning to purchase a buy-to-let, a house in multiple occupation (HMO), or a holiday let, you will need to research whether a limited company is the best way to do it.

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Frequently Asked Questions

Top Commercial Mortgage Lenders in the UK

If you are looking for a commercial mortgage, there are a lot of lenders you can consider. However every lender has a different criteria around the property types and asses the applicants differently. An experienced broker can take your case to the most suitable lender and inform you about the interest rates, terms, and conditions of these lenders to choose the most suitable one for your needs.

Securing Commercial Property Finance for a New Business

Securing commercial property finance for a new business can be challenging, as most lenders prefer to lend to established businesses with a proven track record. However, there are some lenders who are willing to work with startups and new businesses. You can improve your chances of getting approved by having a solid business plan, a good credit score, and a strong financial history.

Process for Obtaining Commercial Investment Mortgage

The process for obtaining a commercial investment mortgage involves several steps. First, you need to find a lender who offers commercial investment mortgages. Then, you need to provide them with your financial information, including your income, expenses, and assets. The lender will then assess your application and decide whether to approve your loan. If approved, you will need to sign a loan agreement and provide collateral for the loan.

Factors Determining the Best Interest Rate for Commercial Property

Several factors determine the best interest rate for commercial property, including your credit score, the loan-to-value ratio, the property type, and the loan term. Generally, the higher your credit score and the lower your loan-to-value ratio, the better interest rate you can get. Additionally, shorter loan terms usually have lower interest rates compared to longer loan terms.

Options for Raising Commercial Property Finance

There are several options for raising commercial property finance, including traditional bank loans, private equity, crowdfunding, and government-backed schemes. Each option has its own advantages and disadvantages, and you should choose the one that best suits your needs and financial situation. You can also consult with a financial advisor to help you make an informed decision.

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Legal Information & Disclaimer

This site is an information only site. All of our articles are written by authorised mortgage brokers for the only aim of providing great, useful, mortgage and loan related information. We intent to offer the best possible suggestions and guides however can’t always guarantee to be perfect, please use the information at your own risk. We can’t accept responsibility if things go wrong. Please contact us via our contact page if you see anything that requires changing and we will do so as soon as possible.

The articles on our site do not provide financial advice. Instead, they aim to equip you with the necessary information to attain your mortgage objectives. 

** 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.