MORTGAGE Blog & ARTICLES
Commercial Mortgages – Your Key to Solve Your Business Financial Shortages
Factories, offices, shops and other business locations are the crucial assets for any business. But, the initial purchase or building costs of these premises are too huge, affecting the financial operations of the business. A commercial mortgage can greatly help by spreading the cost of the purchase of the premises while lessening the initial capital outlay. To give you more hints about this topic, simply read the following paragraphs as your guide.
What are Commercial Mortgages?
Commercial mortgages are used to purchase business premises or to purchase an existing business in its entirety. These are intended for investors and business owners who opt to refinance or buy income producing, commercial properties.
Lenders usually require a deposit of around 25% to 40% of the total value and mortgage terms can run for one year or more. In addition, having a commercial mortgage is based on the ability of your business to make the repayments. Like others, you will also find some lenders to assess your business before quoting you an interest rate. They will look at your business past performance, long term future plans and the current position of your business.
The interest rate you will be quoted may be based on these factors and may be higher if the underwriter recognizes higher risk in the proposal. You may also need to present a detailed business plan which shows that you can make repayments.
How Can Commercial Mortgages Help Your Business?
A commercial mortgage provides funding for more than $1,000,000 for long-term financing of income producing properties. Here are the typical uses for a commercial mortgage you shouldn’t miss to recognize:
- Borrowing money to purchase a shop
- Buying a pub
- Raising finance to buy an office building
- Buying a hotel
- Financing the purchase of a restaurant
- Clearing a business overdraft
- Buying new plant or machinery
- Borrowing money to pay for training and much more!
With commercial mortgages, you have a chance to solve all your business financial issues and other related concerns.
What You Need to Know about Commercial Mortgages?
To qualify for the commercial mortgages, the real estate must be a multi-purpose, office, industrial, retail, commercial or multi-residential property. For added details, here are the things you need to know:
- The assets must be situated in a rental market and active resale where the market rents exist for similar assets and where the property is readily marketable.
- Fixed and variable rate options are accessible. Variable rate option can be renewed to a fixed rate option.
- Multi-residential buildings may be repaid for more than 25 years. Other types of property may be repaid for more than 20 years.
- Mortgages are obtainable for a maximum of five years.
- Mortgages require a current appraisal. This is a passing environmental report and may require a report on the building condition.
Take note that the interest rates on commercial mortgages tend to be lower compared to the interest rate on unsecured business loans and the repayment terms are usually longer. This makes them valuable for all sorts of business financing requirements.
What to Expect when Applying for a Commercial Mortgage?
Do you want to expand to multiple locations or desire to move to a bigger office? Then, commercial mortgages are the best way to help spread the cost. A commercial mortgage is any loan secured on an asset which is not your residence. Getting this type of loan allows you to secure your business location through creating a better work environment, offering legitimacy of a company or by simply putting a business out in the public eye. However, a commercial mortgage is quite hard to get because it takes a long time.
Whether you opt to borrow working capital to expand your business or leverage equity in a commercial property, you will always find out that the commercial loan process is very different from various home mortgage procedures.
As a borrower, you must ensure that the loans are repaid on time. The loans can be repaid in flexible instalments. If searching for a commercial mortgage is proving to be an arduous ordeal for you, you need to seek help from loan experts. With their help, you can easily fulfil all your business requirements. For added information, here are the most common requirements when applying for a commercial mortgage:
- Documented Property Value – The commercial asset being offered as collateral or security pledge to the lender in exchange for the loan. This must be worth the mortgage amount requested.
- Income and Assets of the Guarantor – The credit, income and assets of the guarantor of the commercial mortgages are often used in the process. The guarantor is the person who guarantees that the loan will be paid on time.
- Property Cash Flow – Every commercial mortgage underwriter compares the cash flow of the business with the debt the business carries. Lenders usually look for a steady net income that is at least 20% higher than the carried debt. As a borrower, you must provide detailed statements that show the expenses, income and budget aspects of your business.
What You Will Get from Commercial Mortgages?
Most commercial mortgages can be tailored to suit your own business finances. Thus, you will enjoy the following:
- A choice of loan – Allow you to borrow up to $1,000,000 for long-term financing of income producing properties.
- A choice of interest rate options – The fixed and variable rates allow you to tailor your repayments to suit your own circumstances.
- Flexible Repayment Term – Allow you to repay the loan for more than 25 years.
If you are planning to get the benefits of commercial mortgages, you have to understand the following details:
- Security may be required
- Your business may be charged an arrangement charge, security and valuation fees
- For interest only mortgages, the precise amount borrowed doesn’t lessen during the life of the mortgage. You need to repay the full capital amount at the end of the mortgage term.
Incase you are planning to repay part or the whole fixed rate mortgage prior to the end of the agreed term, you may need to pay an early repayment fee. This is substantial depending on the interest rate at the time.
3 Facts about Commercial Mortgages
Do you want to purchase your own premises or opt to add commercial asset to your portfolio? Then, you likely need a commercial mortgage. Commercial mortgages and business loans are designed to help you raise the capital you need to buy shops, factories, offices or other commercial premises.
Since there are some comparisons between residential and commercial mortgages, lenders generally advance a sum of money protected against the property you purchase.
- You need to provide a personal guarantee – Commercial mortgages are available for partnerships, individuals and to companies. If you opt to borrow in the name of your company, it is best that the directors of the company will have to present personal guarantees to a lender. It means that directors are required to step in and make payments to the commercial mortgages.
- You will need a greater deposit compared to residential purchase – In case you are planning to buy a residential property, you need to find a deposit of at least 10-15% of the purchase cost. Some lenders will need higher deposits to protect the maximum interest rates. When it comes to commercial mortgages, it is not unusual for you to put down between 30 and 40% of the purchase rate. Buying commercial property may require you to commit a significant amount of your own capital.
- Mortgage payments are tax deductible – When you are planning to apply for a commercial mortgage, most lenders consider the interest payments on the loan to be an allowable expense for tax purposes. Thus, your business can claim the cost of interest payments on a commercial mortgage as a tax deduction when preparing the business accounts.
In addition, commercial mortgages may be more affordable than your current business borrowing. Most agencies use unsecured borrowing like credit cards or bank loans to finance some elements of their business. The best thing about a commercial mortgage is that the interest rate charged can usually lesser than other forms of credit. This is because the lender has the security of the property as collateral.
What Information the Bank Needs to Grant Your Application?
Most lenders request various commercial details. Thus, you have to prepare all of their requirements to help your application run smoothly. The information includes documents on the performance of your business.
Take note that the main concern of any lender will be either you can afford to repay the loan or not. Here are the additional details your banks need to grant your commercial mortgage application:
- Audited accounts for the last two years
- Loss and profit forecast for the next few years
- Personal information of the key stakeholders in the company for credit-checking
- Credit status of the business
- Asset and liability statements for every applicant
- Growth projections for the business and much more!
After knowing the different facts about commercial mortgages, you can easily solve your financial issues and expand your business anytime you want. Just make sure that you never fail to repay the amount you borrowed along with its interest rates.
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