If you’re looking to purchase a commercial property for an investment or because you want to purchase the premises you rent, then you’ll probably need a commercial mortgage to finance the purchase.
Before you start looking for a mortgage it is best to have an idea of what your monthly budget will be if you wish to operate from it, or what the possible market is for rental to ensure it will cover the mortgage payments.
Like any finance product, it is good practice to make sure you have searched for the right product for you, but this takes time and dedication, and it may be worth engaging with a commercial broker that covers the whole market.
Unlike residential mortgages which look at reduced factors like your income versus expenditure, commercial mortgages are slightly more complex depending on the need and use of the building.
Commercial property unlike residential comes with some immediate challenges; the buildings are typically unique and demand is unpredictable. Only this year has it been reported that the market price for commercial property is overpriced by an average of 2.3%, meaning many commercial property owners are already looking at reduced equity or in some cases negative equity.
One of the affordability factors for commercial mortgages is the DSCR or the Debt Service Cover Ratio. The Debt Service Coverage Ratio (DSCR) measures the ability of a company to use its operating income to repay all of its debt obligations, including repayment of principal (capital borrowed) and interest on both short-term and long-term debt. Typically a lender will look for an organisation to have a DSCR of 1.75 as a minimum.
The DSCR plays a large factor when a business is purchasing a commercial property to replace the premises they rent already or want to buy the property currently being rented.
Another important factor to consider is LTV (Loan to Value). This is typically published as a percentage (%) and most lenders will limit commercial property mortgages to 70% LTV, though some may stretch to 85% LTV on a case by case. This would mean that on average a business owner would require a deposit for the remainder (between 20% and 30% would be a safe estimate). For example, if you would like to purchase a multiuse commercial property for £400,000 you would need to raise a deposit amount between £80,000 & £120,000.
A commercial broker who has experience in commercial mortgages will be able to help you go through your balance sheets and profit and loss (P&L) accounts and identify the relevant numbers and lending potentials.
If you are looking to purchase a commercial property for investment reasons similar to a residential buy to let, then things change a little bit. For a start, LTV’s tend to drop to between 50% and 65%, and DSCR is not considered but ICR (Interest Cover Ratio) is. The interest coverage ratio (ICR) is a measure of a company’s ability to meet its interest payments. The interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period, often one year, divided by interest expenses for the same time period.
Borrowers looking to lenders with an investment opportunity in commercial property will typically be expected to have an ICR of 125% (the rent must be 125% more than the monthly mortgage payment). While the LTV’s are reduced in some cases, the typical ability to lend is more straightforward as long at the numbers stack up.
What will I need?
Before speaking with your commercial mortgage broker it is worth noting a few documents that will be necessary, and which have supplied a tick list below;
- Audited accounts for the last two years
- A profit and loss forecast for the next two years
- Current business performance (management account information)
- The personal details of the key stakeholders (typically all major shareholders) in the business for credit-checking
- Asset and liability statements for each applicant
- A business plan detailing how the property will contribute to your cash flow and how you plan on repaying the loan
- The credit status of the business
- Details of any personal investments involved
- Growth projections for the business
What are the rates like?
In most cases commercial mortgage rates aren’t far off that of residential mortgages. An example of some of the rates we are sourcing for commercial property are;
3.93% fixed for 3 years
4.58% fixed for 5 years
4.74% fixed for 7 years
It is worth noting that it is not uncommon to have additional costs with commercial mortgages and with any budgeting, you will need to include fees such as a completion or arrangement fee payable to the lender, valuation fees and legal fees. some of these will be payable upfront.
Good luck and if you need any help, you know where we are.