How can I get the best deal on a commercial mortgage?

For any UK business looking to purchase, refinance, or expand its operational premises, obtaining competitive commercial financing is crucial. Commercial mortgages differ significantly from residential mortgages; they are highly bespoke, and pricing often depends heavily on the perceived risk associated with the business, the property type, and the quality of the application. Understanding how can I get the best deal on a commercial mortgage involves strategy, preparation, and expert guidance.

Preparation Is Paramount: Understanding Your Needs

Lenders need confidence that your investment is sound and that your business has a clear, profitable future. The quality of your initial preparation directly correlates with the competitiveness of the offers you receive.

Define Your Property and Business Strategy

Before approaching any lender, you must clearly define what you need and how the property fits into your long-term business strategy. Commercial mortgages are available for various property types, including offices, warehouses, retail units, and industrial sites. However, lenders categorise these differently, which impacts the available Loan-to-Value (LTV) and pricing.

• Owner-Occupier vs. Investment: Are you using the property solely for your business operations (owner-occupier), or are you buying it to rent out to tenants (commercial investment)? Owner-occupier mortgages often carry less risk in the eyes of the lender and may attract slightly lower rates.
• Viability of the Business Plan: A strong, detailed business plan is non-negotiable. It must clearly outline projected revenues, cash flow analysis, management expertise, and how the new premises will contribute to future profitability.

Optimising Your Financial Profile

Lenders will rigorously assess the financial health of the borrowing entity (the company) and, frequently, the directors or principal shareholders.

1. Strengthen the Loan-to-Value (LTV) Ratio

The single most influential factor affecting the interest rate is usually the LTV ratio—the percentage of the property’s value that you wish to borrow. Lenders offer better rates and terms when the borrower contributes a larger deposit, reducing the lender’s exposure to risk.

While some commercial lenders may offer up to 75% LTV, aiming for a lower ratio—perhaps 60% to 65%—could unlock the best rates available in the market. If you need assistance determining if you are financially ready to apply for a mortgage, you can seek impartial guidance from an organisation such as MoneyHelper.

2. Ensure Robust Financial Accounts

Commercial lenders typically require three years of certified trading accounts for existing businesses. These accounts must demonstrate consistent profitability and strong debt service coverage (the ability of the business to generate sufficient cash flow to meet the proposed mortgage payments and other debts).

• Accuracy and Cleanliness: Ensure your accounts are accurate, up-to-date, and signed off by a qualified UK accountant. Any inconsistencies or delays in providing documentation can signal potential risk to the lender.
• Personal Finances: If your business is relatively new, or if you are securing the loan via a limited company structure, lenders will likely scrutinise the personal assets and liabilities of the directors.

3. Review Your Credit Health

Although commercial mortgages primarily assess the business’s ability to repay, the personal credit history of the directors and key shareholders is often vital, particularly for smaller limited companies. Poor credit history, including defaults, County Court Judgments (CCJs), or missed payments, can lead to higher interest rates or outright rejection.

Before applying, obtain a full copy of your personal and business credit reports to check for any inaccuracies and understand your current standing. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Navigating Rates, Fees, and Commercial Terms

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The ‘best deal’ isn’t just about the lowest headline interest rate. It involves understanding the total cost of borrowing, which includes arrangement fees, valuation costs, legal expenses, and early repayment charges (ERCs).

Understanding Interest Rate Structures

Commercial mortgages generally offer two main interest rate structures:

1. Fixed Rates: The interest rate is locked in for a set period (e.g., two, three, or five years). This offers budget certainty, but if market rates drop, you could be locked into a higher rate, and early exit may incur high fees.
2. Variable Rates (Base Rate Linked): The rate fluctuates based on a benchmark, typically the Bank of England Base Rate plus a margin. While this allows you to benefit from rate reductions, your monthly payments could rise unexpectedly.

For a business seeking maximum financial predictability, a fixed rate might offer better overall value, even if the initial percentage is slightly higher than a variable alternative.

Decoding Fees and Charges

Lenders charge several fees that can significantly increase the total cost of your commercial mortgage, even if the interest rate looks appealing. When comparing offers, ask for a Key Facts Illustration (KFI) or similar detailed quote that itemises all charges.

• Arrangement Fees (or Facility Fees): This is the lender’s fee for setting up the loan. It is usually calculated as a percentage of the loan amount, often ranging from 1% to 2.5%. Often, this fee can be rolled into the loan, but this means you pay interest on it.
• Valuation Fee: You are responsible for the cost of the lender’s independent valuation of the commercial property. This cost varies significantly based on the property’s complexity and value.
• Legal Fees: You must cover the lender’s legal costs (even if you use your own solicitor).
• Exit/Early Repayment Charges (ERCs): These are critical. Commercial ERCs can be stringent, sometimes lasting the entire duration of the initial term, or structured on a sliding scale (e.g., 5% in year one, decreasing annually).

The Role of Specialist Lenders and Brokers

Unlike residential mortgages, where high street banks dominate, the commercial mortgage market is vast and heavily reliant on specialist lenders, building societies, and challenger banks. This is why securing the best deal often involves professional assistance.

Why Use a Specialist Commercial Mortgage Broker?

Commercial mortgages are not regulated in the same way as residential mortgages by the Financial Conduct Authority (FCA), meaning terms are more flexible but also more complex. A specialist broker is essential because:

1. Market Access: Brokers have relationships with lenders who do not deal directly with the public, including private equity funds and niche finance houses.
2. Negotiating Power: They understand the risk parameters lenders use and can package your application to mitigate concerns, leading to better negotiation leverage on rates and fees.
3. Speed and Efficiency: Commercial deals are often time-sensitive. A broker can dramatically speed up the process by knowing exactly which lender is suitable for your specific property type (e.g., a petrol station or a nursing home).
4. Filtering the Fine Print: They ensure you fully understand the structure of the debt, including any covenants (conditions attached to the loan) or cross-collateralisation clauses, which are common in commercial lending.

Comparing Offers Effectively

When you receive competing offers, look beyond the quoted interest rate. A strong broker will help you calculate the effective annual cost of borrowing, factoring in all fees and charges over the anticipated repayment period.

Ask critical questions about:

• What is the total fee payable up front?
• How flexible are the covenants, and what constitutes a breach?
• What are the precise terms for early repayment?
• What is the standard turnaround time from application to funding?

Alternative Funding Options and Exit Strategies

While the goal is to obtain the best long-term commercial mortgage, sometimes businesses need short-term financing to facilitate a purchase or property development quickly.

Considering Bridging Finance

Bridging loans are short-term, flexible finance solutions often used to cover the gap between the purchase of a new property and the securing of long-term commercial finance, or before an existing property is sold. They typically have higher interest rates than mortgages but are arranged much faster.

Risk Warning: If you are using bridging finance secured against property: Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and additional charges. Always ensure your exit strategy is robust.

Long-Term Refinancing

Even if you secure an excellent commercial mortgage deal today, market conditions and your business performance will change. To ensure you continue to benefit from the most competitive rates, plan to review your mortgage terms every three to five years, especially as early repayment charges (ERCs) expire.

Refinancing can be a powerful tool to:

• Switch from a variable to a fixed rate (or vice versa).
• Reduce your rate if your business credit profile has significantly improved.
• Raise additional capital against the increased value of the property for expansion.

Refinancing involves costs similar to the original application (valuation, legal fees, and new arrangement fees), so the savings on the interest rate must outweigh these upfront expenses.

People also asked

How long does it take to secure a commercial mortgage in the UK?

The commercial mortgage process is generally longer and more detailed than residential lending. Typically, it takes between 6 to 12 weeks from the initial application submission to the completion of funds, depending heavily on the complexity of the property, the speed of the property valuation, and the efficiency of the legal due diligence.

What deposit is required for a commercial mortgage?

Lenders usually require a minimum deposit of 25% of the property purchase price, meaning the maximum Loan-to-Value (LTV) is 75%. However, to achieve the most competitive rates and terms, a deposit of 30% to 40% is often advisable, particularly for non-standard or niche commercial properties.

Are commercial mortgages regulated by the FCA?

No, standard commercial mortgages secured solely against commercial property are generally not regulated by the Financial Conduct Authority (FCA). This means borrowers have fewer consumer protections than with residential mortgages, making it even more important to secure comprehensive advice and carefully read the contract terms.

Can I get a commercial mortgage with no trading history?

Securing commercial finance with no trading history is challenging but possible, typically through specialist lenders. Lenders will require a robust personal balance sheet from the directors, significant personal experience in the industry, and a comprehensive, realistic business plan that demonstrates highly viable cash flow projections to offset the lack of trading accounts.

Are interest-only commercial mortgages available?

Yes, interest-only terms are often available for commercial mortgages, particularly for property investors. This option reduces monthly outgoings but means the principal loan amount is only repaid at the end of the term, requiring a robust exit strategy (e.g., selling the property or securing a new loan) to pay off the outstanding capital.

Conclusion: Achieving the Best Deal

Securing the best deal on a commercial mortgage is a strategic exercise that demands proactive management of your financial profile and a strategic approach to market comparison. By focusing on maximising your deposit contribution, ensuring flawless documentation, and utilising the expertise of a specialist commercial finance broker, you put your business in the strongest possible position to attract highly favourable terms, ultimately reducing your long-term borrowing costs.