A commercial mortgage is simply a loan for a property that is used for business purposes. It is arguably the best way to finance the purchase of buildings and land for business because it provides a flexible and affordable solution that gives you access to capital.

Commercial mortgages are specialised due to the fact that the lender has a legal claim over the property until the loan has been repaid in full. In the event of non-payment the property can be repossessed and sold as a means of repaying the outstanding mortgage balance.

There are a number of different commercial mortgages such as ‘own use’ and commercial investment. ‘Own use’ is the most common and is quite simply a mortgage to buy a property from which to run your own business. Commercial investment mortgages are loans to purchase commercial property in order to rent it out to business tenants.

Commercial mortgages can be used for a variety of purposes, for example the purchase of business premises, expansion, residential and commercial investment or property development. Some uses or business concerns may be excluded or have restrictions placed on them by the lender, so we talk to a number of different providers about your business’ needs.

When arranging a mortgage it is important to consider the effects of the loan on your cash flow and assets. You will pay back the loan according to a repayment schedule that sets your fixed payments, and you will normally be required to make monthly, quarterly or yearly repayments, depending on the scheme you select. This schedule is designed to minimise the effects on your cash flow, but different schemes will suit different businesses depending on their line of work, industry, size etc.

Lending institutions such as banks and building societies offer commercial mortgages and there is a range of options open to you - providing you meet the lenders’ criteria. Some lenders may accept applications where there is an adverse credit history, but the majority of lenders require your business to be creditworthy. Again, try to talk to a range of different providers before committing yourself.

If you choose to finance your business venture with a commercial mortgage, the premises you fund will act as security for the lender and the lender will therefore have a legal charge over that property.

There are a number of things to watch out for when choosing a commercial mortgage. This advisory role is how a commercial mortgage broker can help you.

For example, the lender may charge up-front loan or processing fees. Make sure you ask for an estimate of these costs as soon as possible to help you evaluate the mortgage package. It is also advisable to check if you will be penalised for paying off your mortgage (all or in part) before its due date. Many lenders charge a redemption penalty in the first three to five years of the mortgage, so try to make sure that your mortgage agreement gives you this flexibility. Also try to get a grace period for any payments. For example, the monthly payments may be due on the first day of each month, but they won't be deemed late until the fifth day of the month.

Before ownership of the property passes to you, you will incur several closing costs in addition to the cost of the property and mortgage arrangement fees, such as the site survey fee and various charges for preparing the legal documents. Don’t forget to take these into account when budgeting.

If you are looking for commercial finance, contact your Commercial Mortgage broker today for an obligation free meeting.

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