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Commercial Mortgages: Understanding the Process and Criteria

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If you’re looking to secure a commercial mortgage, it can be a daunting and time-consuming process, especially if it’s your first time. However, working with an experienced professional can make all the difference. 

What is The Process

If you want to apply for a commercial mortgage, you will need to follow a specific process. First, you will need to talk to one of our commercial mortgage experts who will assess your application and discuss your project’s details. Assuming your application is viable, you will receive a written quote outlining the interest rate, fees, and borrowing terms. You will also receive a list of documents required to submit a full application.

A surveyor will be instructed to compile a comprehensive valuation report on the property. This report may take longer to complete than a residential valuation, but we always push to speed up the process for you.

Your solicitor will be instructed to carry out the legal work and satisfy all conditions. They will run through the terms of the agreement and ensure you fully understand the loan. Once satisfied, you will sign the formal offer and return it to the lender. It is essential that your solicitor is familiar with the commercial mortgage process as inexperience here can slow progress significantly.

Once your solicitor has completed the legal work, and the funds have been released, the loan will be completed.

Throughout this process, it is essential to work closely with your commercial mortgage broker, who can offer valuable advice and input. The advice and input of an experienced independent broker could prove invaluable throughout all steps of the application process.

Remember, there are different types of commercial mortgages with varying interest rates and fees. It’s essential to understand the differences between fixed interest rates and variable rates to choose the right option for you.

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What is a Commercial Mortgages

When it comes to commercial mortgages, it’s important to understand that they are not the same as residential mortgages. Commercial mortgages are manually underwritten, which means that the application process takes longer than residential mortgages. However, this manual underwriting process has its advantages, as commercial mortgage underwriters can be more flexible and take a more individual approach to each application.

One of the main differences between commercial and residential mortgages is that commercial mortgages are used to purchase or refinance commercial properties, such as office buildings, retail spaces, and industrial facilities. These properties can be owner-occupied or used for investment purposes. Commercial mortgages are also used for property development and refurbishing.

When applying for a commercial mortgage, it’s important to provide a full picture of your business’s financial performance and assets. This can include showing reinvestment in the business, which may not be reflected in the accounts. By providing a complete picture, you increase your chances of getting the best possible deal and ensuring a quick completion.

There are different types of commercial mortgages available, including buy-to-let mortgages, commercial investment mortgages, and owner-occupied mortgages. Each type has its own criteria and eligibility requirements, so it’s important to work with an experienced independent broker to find the most suitable product for your business.

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Commercial Mortgage Application

To speed up your commercial mortgage application, ensure that you spend additional time producing the application pack upfront. Although the lender will let you know the documents required, providing full detail upfront and responding quickly to requests is the best way to speed up your application. Any further detail about positive future changes in your financial position or anticipated trading will help.

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What is the Criteria

When applying for a commercial mortgage, lenders have specific criteria that they look for. Here are the sub-sections that outline the criteria that lenders consider when assessing your application:

Maximum Loan Amount

Commercial mortgages are available for loan sizes starting from £25,000 and there is no maximum loan size. Lenders can offer bespoke terms for large commercial mortgages.

Mortgage Term

Commercial mortgages have a term of 5 to 30 years.

Acceptable security types

Lenders consider any type of commercial property as security. They can even consider predominantly residential property or land as security. Some of the properties that lenders consider as acceptable security include offices, land, professional practices, care homes, pubs and bars, restaurants, hotels, guest houses, retail premises, business parks, warehouses, factories, HMOs, and semi-commercial units.

borrowers

Lenders can lend to individuals, offshore companies, partnerships, limited companies, LLP/other company structures, and pension funds (where the pension fund is allowed to borrow money). Lenders can lend to borrowers from 18 years of age, and most lenders will fund clients to the age of 75.

Acceptable Locations

Lenders can arrange commercial mortgages across the UK, with no geographical restrictions.

Credit Score and History

Credit history is a key factor in many lenders’ credit decisions. Although most lenders prefer clean credit, they can fund clients with any level of adverse credit, as long as you are not currently bankrupt. As the level of adverse credit increases, interest rates and loan to value (LTV) may be affected.

How to Evidence the Income

For owner-occupied applications, two years’ accounts are usually required. Lenders have lenders who are willing to accept accountants’ certificates or projections in lieu, where appropriate.

Acceptable Repayment methods

Interest-only or capital repayment is available.

Lease Term

Some commercial investment mortgage lenders require the lease to extend beyond the term of the loan. This is not the case with all lenders, and your loan may still be acceptable with a short, or even rolling lease.

Do the lenders meet prior to releasing the loan?

Some (but not all) lenders arrange a meeting before taking your loan to formal offer. The meeting has three main aims: to get to know you personally, to allow the person handling the application to understand exactly what you’re trying to achieve, and to understand your business.

The meetings don’t tend to be too scary and, in reality, people who work in banks can actually be very friendly! If you are prepared and know your business, you will find the meeting far less daunting than is first imagined.

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Frequently Asked Questions

What are the common types of commercial mortgages available in the UK?

There are several types of commercial mortgages available in the UK, including fixed-rate mortgages, variable-rate mortgages, interest-only mortgages, and repayment mortgages. Fixed-rate mortgages have a fixed interest rate for a set period of time, while variable-rate mortgages have an interest rate that can fluctuate based on market conditions. Interest-only mortgages allow borrowers to only pay the interest on the loan, while repayment mortgages require borrowers to pay both the interest and the principal.

What is the typical deposit required for a commercial mortgage?

The typical deposit required for a commercial mortgage in the UK can vary depending on the lender and the type of property being purchased. Generally, lenders require a deposit of at least 25% of the property’s value, although some lenders may require a higher deposit.

How do commercial mortgage lenders assess the creditworthiness of a borrower?

Commercial mortgage lenders assess the creditworthiness of a borrower by looking at their credit history, income, and assets. They will also consider the borrower’s business plan, the value of the property being purchased, and the amount of the loan requested. Lenders may also require a personal guarantee from the borrower or a third-party guarantor.

What are the current commercial mortgage rates in the UK?

Commercial mortgage rates in the UK can vary depending on the lender, the type of property being purchased, and the borrower’s creditworthiness. Generally, rates for commercial mortgages are higher than rates for residential mortgages, and can range from 2% to 8% above the base rate.

What are the criteria for obtaining a commercial mortgage in the UK?

The criteria for obtaining a commercial mortgage in the UK can vary depending on the lender and the type of property being purchased. Generally, lenders will look at the borrower’s credit history, income, assets, and business plan. They will also consider the value of the property being purchased and the amount of the loan requested. Lenders may also require a personal guarantee from the borrower or a third-party guarantor.

What are the top considerations when comparing commercial mortgage lenders in the UK?

When comparing commercial mortgage lenders in the UK, it is important to consider factors such as interest rates, fees, loan terms, and eligibility criteria. Borrowers should also consider the lender’s reputation, customer service, and experience in the commercial mortgage market. It is important to shop around and compare multiple lenders to find the best deal.

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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.

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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.