What is the difference between commercial development finance and a commercial mortgage?

Securing funding for commercial property can be complex, with various financing options available. Two common choices are commercial development finance and commercial mortgages. While both involve borrowing money for commercial property, they cater to different needs and carry distinct features. Understanding the differences is crucial for making informed decisions.

Commercial Mortgages: Funding Existing Properties

A commercial mortgage is a loan specifically designed to purchase an already existing commercial property. This could be anything from a retail unit to an office block, or even a larger industrial estate. Think of it as a mortgage for a business, similar to a residential mortgage but tailored to commercial properties.

• Purpose: Purchasing an existing commercial property.
• Loan-to-Value (LTV): Typically lower than development finance, reflecting the lower risk. LTV usually sits between 50% and 75% but can depend on the lender and the property’s valuation.
• Repayment: Usually involves regular monthly repayments of both capital and interest.
• Risk: Generally considered lower risk than development finance as the property already exists.

Commercial Development Finance: Funding New Projects

Commercial development finance, on the other hand, is used to fund the creation of new commercial properties or the substantial refurbishment of existing ones. This means financing the entire development process, from land acquisition and planning permission through to construction and completion.

• Purpose: Funding construction, refurbishment, or conversion of commercial properties.
• Loan-to-Value (LTV): Can be higher than with a commercial mortgage, often reaching 70% or more, but this will depend on the project, lender, and borrower’s experience.
• Repayment: Repayment terms can be flexible, often structured around the project’s milestones or completion date. Interest may be rolled up until completion.
• Risk: Considered higher risk due to the inherent uncertainties involved in construction projects, including potential cost overruns and delays.

Key Differences Summarized

Here’s a table summarising the key differences between commercial development finance and commercial mortgages:

• Purpose: Commercial mortgages are for purchasing existing properties; development finance is for building or refurbishing new ones.
• Risk: Commercial mortgages are generally lower risk; development finance carries higher risk due to construction uncertainties.
• Loan-to-Value (LTV): Commercial mortgages typically have lower LTV ratios; development finance often allows for higher LTVs.
• Repayment: Commercial mortgages usually involve regular monthly payments; development finance repayment schedules are often more flexible, potentially with interest rolled up until completion.
• Eligibility: Both require strong credit history and significant equity, but development finance may demand more detailed project plans and experience.

Assessing Your Needs

Choosing between commercial development finance and a commercial mortgage depends entirely on your specific circumstances and project goals. If you’re simply buying an established commercial property, a commercial mortgage is the suitable option. However, if you’re planning a new build or extensive refurbishment, you’ll need commercial development finance.

It’s crucial to carefully assess your financial situation, the complexity of your project, and your risk tolerance. Seek professional financial advice to help determine the most suitable financing solution for your needs.

Understanding the Risks

Both commercial mortgages and development finance involve significant financial commitments. It’s essential to understand the potential risks involved.

With commercial mortgages, defaulting on payments could lead to legal action, repossession of the property, and damage to your credit rating. With development finance, the complexities of construction add further risks such as cost overruns, delays, and potential project failure. Your property may be at risk if repayments are not made.

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People also asked

What is the typical interest rate for commercial development finance?

Interest rates for commercial development finance are generally higher than for commercial mortgages due to the increased risk, and will vary depending on factors like the project, the borrower’s creditworthiness, and the lender.

How long does it take to secure commercial development finance?

Securing commercial development finance can take longer than a commercial mortgage, often requiring extensive due diligence and appraisal of the development plan. The timeframe varies based on the complexity of the project.

What security is typically required for commercial development finance?

Lenders typically require significant security, often including the property itself as collateral, along with personal guarantees from the borrower. Further security may be required depending on the project and lender assessment.

Can I get commercial development finance for a small-scale project?

Yes, smaller-scale projects can be funded through commercial development finance, though the eligibility criteria and loan terms may differ from larger-scale developments.

Where can I find more information on commercial property finance?

The UK government provides information and guidance on various aspects of business finance, and the Financial Conduct Authority (FCA) regulates financial services within the UK. You can find helpful resources on their websites. gov.uk You should seek professional financial advice for specific guidance.

Remember, this information is for general guidance only and does not constitute financial advice. Always seek professional advice tailored to your specific circumstances.