What fees are associated with commercial mortgages?

Commercial mortgages, vital tools for UK businesses looking to acquire or refinance property, involve a complex structure of fees beyond just the principal and interest. Understanding what fees are associated with commercial mortgages is crucial for accurate budgeting and ensuring the viability of your commercial venture. These costs typically fall into three main categories: lender fees, third-party professional fees, and ongoing ancillary costs.

Understanding What Fees Are Associated with Commercial Mortgages in the UK

Securing commercial property finance is significantly different from obtaining a residential mortgage. Commercial transactions are bespoke, meaning the associated costs and fees are highly variable, depending on the property type, the complexity of the deal, the lender chosen, and the specific risk assessment applied. Transparency regarding these fees is paramount, as they can collectively add tens of thousands of pounds to the overall cost of the acquisition.

Category 1: Lender Fees (Facility and Administration Costs)

Lenders charge specific fees to cover the administrative burden of assessing the application, setting up the facility, and managing the risk throughout the loan term. These are often calculated as a percentage of the total loan amount.

• Arrangement Fee (or Facility Fee): This is typically the largest single fee charged by the lender. It covers the processing and provision of the loan. It is usually calculated as a percentage of the loan amount, commonly ranging from 1% to 3%. In many cases, this fee is added to the loan balance rather than paid upfront, which means you will pay interest on the fee itself.
• Booking Fee: Sometimes charged separately or included within the arrangement fee, this non-refundable fee covers the initial costs of registering your application and reserving the funds. It is often required upfront, even if the application does not proceed.
• Commitment Fee: If the loan is being released in stages (common for development finance or specific commercial projects), a commitment fee may be charged on the undrawn portion of the facility. This guarantees that the funds remain available when you need them.
• Exit Fee (or Redemption Fee): While less common today, some specialist commercial loans, particularly bridging or higher-risk facilities, may include an exit fee. This is charged when the loan is fully repaid (redeemed), either at the end of the term or upon refinancing. It can be a fixed amount or a percentage of the initial loan amount or the outstanding balance.
• Early Repayment Charges (ERCs): If you choose to repay the mortgage early—either through refinancing or selling the property—lenders typically impose an ERC. This compensates the lender for the loss of interest they expected to receive. These clauses are critical to review, especially if you anticipate selling the property or moving to a cheaper deal in the short to medium term.

Category 2: Third-Party Professional Fees

Several external professionals must be engaged to complete the transaction, providing independent due diligence and legal oversight. These fees are usually paid directly by the borrower to the service provider.

Valuation and Survey Fees

Every commercial mortgage requires a professional valuation to confirm the property’s market worth and assess its suitability as security for the debt. Unlike residential valuations, commercial valuations are significantly more complex and costly, as they often involve assessing potential income streams and specialist uses (e.g., warehousing, retail units, or HMOs).

• Valuation Fee: This cost is based on the size, complexity, and value of the property. Lenders will typically require their own panel surveyor to conduct the valuation, and the borrower must cover this expense regardless of whether the loan completes.

Legal and Solicitor Fees

Legal fees are compulsory and often substantial in commercial property transactions due to the complex nature of the contracts, security documentation, and ownership structures (e.g., limited company, partnership). The borrower typically pays fees for both their own solicitor and the lender’s solicitor (Lender’s Legal Costs).

• Borrower’s Legal Costs: Covering the legal work involved in due diligence, contract review, and managing the property transfer.
• Lender’s Legal Costs: The borrower is generally liable for the costs incurred by the lender in preparing the security documentation and confirming they have good and valid title over the asset.

Broker and Advisory Fees

Many commercial mortgages are arranged via specialist brokers who possess the expertise to navigate the complex market and secure competitive terms. Broker fees are often structured in two ways: a direct fee paid by the client, or commission (known as a procuration fee) paid by the lender, or a combination of both.

Before a lender or broker proceeds, they will often perform due diligence, which typically includes running a credit check on the directors or partners of the borrowing entity. 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)

Category 3: Tax and Ancillary Costs

Beyond the direct loan costs, UK businesses must budget for significant transactional taxes and mandatory expenses.

Stamp Duty Land Tax (SDLT)

SDLT (or Land and Buildings Transaction Tax (LBTT) in Scotland, or Land Transaction Tax (LTT) in Wales) is often the largest single expense outside of the purchase price. Commercial properties are subject to different, tiered SDLT rates than residential properties. It is vital to seek professional advice as failing to calculate this correctly can severely impact financial planning. For up-to-date guidance on non-residential SDLT rates, please refer to HMRC’s Stamp Duty Land Tax guidance.

Insurance Requirements

Lenders will mandate that the commercial property is adequately insured from the day of completion. This usually involves buildings insurance, covering the full rebuild cost. Depending on the usage (e.g., if tenants are involved), public liability insurance may also be required.

Accountant and Tax Advisory Fees

While not a direct fee associated with the mortgage application, securing a commercial mortgage often requires input from an accountant to verify business finances, create projections, and ensure the ownership structure is tax-efficient. These professional fees are essential for a successful application.

Non-Standard Fees and Penalties

In certain scenarios, additional charges may apply:

• Drawdown Fees: If the funds are released in multiple tranches (common in construction or refurbishment), a small fee might be charged each time funds are requested.
• Default Charges: If repayments are missed or the terms of the agreement are breached, the lender will impose penalties, which can include higher interest rates and administrative charges. Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, and significant additional charges.

Budgeting and Structuring Commercial Mortgage Fees

When assessing a commercial mortgage offer, businesses should ask the lender or broker for a comprehensive illustration detailing all potential fees. Key questions include:

• Are the arrangement fees payable upfront or added to the loan (capitalised)? Capitalising fees increases the total interest paid over the term.
• What is the effective cost of borrowing once all fees (APRC) are considered?
• What is the precise structure and timing of any potential exit fees or early repayment charges?

Careful financial planning is essential, as the total costs associated with commercial mortgages can easily range from 5% to 10% or more of the initial loan amount, depending on the complexity of the deal.

People also asked

Are commercial mortgage fees negotiable?

Yes, many commercial mortgage fees, particularly the arrangement fees charged by the lender or the broker fees, are negotiable. The lender’s willingness to negotiate typically depends on the strength of the application, the borrower’s financial profile, the loan-to-value ratio, and the overall volume of business the broker brings to the lender.

Are commercial mortgage fees tax-deductible?

Generally, certain fees associated with obtaining commercial finance, such as arrangement fees, legal fees, and valuation costs, may be deductible against your business’s taxable profits, as they are costs incurred wholly and exclusively for the purpose of the trade. However, the purchase price itself and the SDLT are typically capital expenditures. Always consult a qualified UK accountant or tax advisor for definitive guidance.

How quickly must I pay the associated fees?

The timing of fee payment varies significantly. Booking fees and valuation fees are almost always required upfront before the application proceeds. Arrangement fees are typically paid upon completion, often deducted from the loan funds, while legal costs are paid before or on completion, following the finalisation of the necessary legal work.

What is the difference between an arrangement fee and an exit fee?

The arrangement fee (or facility fee) is charged at the start or completion of the loan for setting up the facility. In contrast, an exit fee (or redemption fee) is charged at the end of the loan term when the borrower fully repays the outstanding balance, usually as a mechanism to protect the lender’s profitability on short-term or specialised deals.

In summary, securing commercial property finance is a strategic investment that comes with a robust structure of associated costs. By thoroughly reviewing and budgeting for lender arrangement fees, third-party professional costs (legal and valuation), and essential taxes like SDLT, businesses can move forward confidently and ensure the commercial mortgage supports their long-term growth objectives.