Commercial Mortgages

Raising business financeA wide variety of banks, building societies, asset based lenders and insurance companies provide mortgages against commercial property.

This type of finance should be readily available in most situations and the issues that the lenders will look at, as with lending to an individual on a domestic mortgage, concern:

  • the property’s value; and
  • the loan’s affordability for the borrower.

Finance professionals tend to divide lenders in many areas of business into tiers. In the case of commercial mortgages for example, banks and building societies will be regarded as the top tier or primary lenders. Strong borrowers with a record of profitability, good cashflow, a healthy balance sheet and no problems with their credit history (known as adverse) such as County Court Judgements (CCJs) will tend to be able to obtain offers from the primary lenders at low rates.

Below these there are a range of secondary lenders, typically smaller operators who have a particular specialism or product and finally there is the tertiary tier of lenders who may deal with cases with significant levels of adverse, or issues about profitability, or lack of accounts.

As deals become more difficult, borrowers have to go down the tree to the secondary and then the tertiary tiers where rates become higher to compensate for the increased levels of perceived risk.

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Property value

The amount of money you will be able to borrow will be determined first and foremost by the value of the property. While many providers advertise higher levels of loan to value, advances from banks are usually in the range 60% to 65% of Open Market Value (OMV) based on the security of a first fixed charge, where the lender’s charge has priority over any other secured lenders.

Through a brokerage or specialist advisor you may be able to raise 70% to 75% from specialist secondary lenders, with some on occasions going to 80%, although in practice post credit crunch advances of this level are once again very rare.

The property value used will normally be the current Open Market Value.

When you own the building and are looking to take out a mortgage to raise cash, be realistic about how much the property is likely to be worth. If you have an unrealistic figure in mind you are simply going to be disappointed as the lender will always require an independent valuation before confirming any offer of funds. If the valuer reports a lower figure for the property than you have given in your application (downvaluing) then the lender will reduce the proposed advance accordingly. Where the property is rented out the lender and the valuer will be concerned with the rental income stream.

When buying a commercial property mortgage lenders will usually lend based on the lower of either the valuation or the purchase price as they take the view that the actual sale price is always the real value of the property, whatever a valuer might say.

This can lead to problems in circumstances where you are genuinely able to buy a property at a discounted rate or depressed value, perhaps as part of a larger deal. In some of these situations it can make sense to take out a short-term bridging loan and arrange to then refinance again in say six months, since once you have owned a property for over six months many more mainstream lenders will then be able to lend based on a valuation rather than the purchase price.

Key issues that can affect valuations and in practice therefore the speed and ease of raising mortgages as well as the sum available include:

Whether there are any environmental or contamination issues with the property. These can include items built into the property such as asbestos which will often be found in older industrial units or underground oil tanks which may be seen as a threat to groundwater, and can be surprisingly expensive to fill in and seal.

Contamination issues can obviously also arise from the work that has been carried out on a site. Where heavy industry has been involved the risk may be easy to see, but some can come as a surprise. One site had been used after the second world war for dismantling aircraft with the result that part of the site was found to be contaminated with low levels of radiation from the luminous paint used on the cockpit dials. In another case, a paddock in West Midlands was described as fireproof as a result of a history of use in scrapping railway carriages with asbestos brake linings.

If such issues (particularly asbestos) occur, at the very least you will be looking at a requirement for a specialist survey to assess the risk and cost involved. This is important as these issues can be real risks to you as a buyer (and to the lender in terms of the value of their security) as the existing owner can be held responsible for the costs of decontamination by the local authorities. So in the worst case you can have to meet the cost of clearing up someone else’s mess.

Whether there are any party wall issues.

The area – some lenders such as the smaller building societies will only wish to lend in their local area.

The type of property and its uses where lenders will differ in the types of properties they will lend against. For licensed premises the breweries offer a range of specialist deals, while there are also specialist lenders in respect of agricultural land.

The tenure of the property, which can be freehold or leasehold so long as the lease has sufficient length of time to run, which for most lenders means that the remaining term of the lease has to be a specified number of years longer than the term of the loan.

Many smaller commercial properties such as rented shops are only held on short leases which mainstream lenders do not therefore regard as providing any meaningful security. But even here some specialist lenders do claim to operate.

Whether any part of the property is to be used as a domestic residence for you or members of your family, as is common for example with many pubs and shops. Under the new mortgage regulations, loans which take a first charge over domestic properties are now regulated by the Financial Services Authority (FSA) and borrowers therefore need to have had advice from an appropriately regulated person such as an Independent Financial Advisor (IFA).

This requirement is limited to properties where over 40% of the area is used for domestic purposes and as the total area for this purpose can include external spaces such as car parks, in practice many pubs can escape this issue.

This regulation can also crop up as an issue on other types of commercial loan if you give a personal guarantee which is supported by a first charge on your home.

Loans supported by second charges over your home are not covered by this legislation.


Unlike bridging loans, most commercial mortgage lending is status lending which means that it is based on assessing the borrower’s likely ability to make payments in future. Lenders will therefore want to check whether you appear to be able to afford both to service the loan which means to pay its interest; and to repay the capital borrowed.

Their starting point is to look at your last three years accounts to check whether you have had both reasonable trading results and reasonable stability over this period. They will therefore be looking to see whether you have had:

  • an overall profit in total over the three years
  • an upwards or downwards trend in the profit or loss over the period; and
  • any catastrophic trading results in any one year.

If your business demonstrates a reasonable level of stable profits over this length of time than the lender will be looking to move to the next step which is to check that the level of profit is sufficient to cover the payments required.

To do so the lender will usually arrange to add back into your profit and loss account a number of items such as depreciation charge, any interest charge on loans that will be replaced by the mortgage that is being taken out, and sometimes part of the directors remuneration, so as to assess the business’s underlying ability to generate cash with which to make the payments, and the ratio of this cash to the likely payment level.

If you are applying for a loan through a broker or an advisor they will normally request detailed information about your business’s costs in order to prepare a credit application (sometimes simply known as a ‘credit’) to put into lenders with this type of analysis already done.

It may be however, that your results show an overall loss over the period, or insufficient profits to meet mainstream lenders normal affordability criteria, or a catastrophic loss in a recent period or perhaps even you simply do not have accounts going back far enough to give the required history as you may be a start-up or relatively new business.

In this case you will probably need help from a broker or advisor in accessing a secondary or tertiery  lender prepared to consider a loan.

These lenders may also accept clients with significant levels of adverse credit but this will be assessed on a case-by-case basis.

To cover the increased level of perceived risk in such loans, these lenders will load their interest rates and so will be more expensive than first tier lenders.

Since this type of secondary lender expects that borrowers then go on to generate reasonable profits and will then look to refinance at lower rates with more mainstream lenders, they will also often have early repayment penalties built into their contracts. A typical example might be a 5% repayment penalty in the first year, falling by 1% a year.

Information provided is copyright and subject to the Important Notice on the home page.

Of course the information contained in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and as these can have serious implications you should always seek appropriate professional advice on your own particular circumstances before taking any action.

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