What Fees Are Associated with Commercial Mortgages in the UK?

Securing a commercial mortgage is a significant step for any business, whether you’re buying your first premises, expanding your portfolio, or refinancing an existing property. While the interest rate is a major factor, it’s crucial to understand the full spectrum of costs involved. Understanding what fees are associated with commercial mortgages from the outset helps you budget accurately and avoid unexpected financial strain. These costs can be broken down into upfront charges, ongoing costs, and potential future fees.

Upfront Commercial Mortgage Costs

These are the fees you will generally need to pay before or at the point of the loan being finalised. They often represent the most significant initial cash outlay beyond your deposit.

Lender’s Arrangement Fee

This is a fee charged by the lender for setting up the loan. It is one of the most substantial costs you’ll face. It’s typically calculated as a percentage of the total loan amount, commonly ranging from 1% to 2.5%.

For example, on a £300,000 commercial mortgage with a 1.5% arrangement fee, the cost would be £4,500. In many cases, you have two options for paying this fee:

• Pay it upfront: You pay the full amount directly from your own funds before the loan is released.
• Add it to the loan: The fee is added to your total mortgage balance. While this avoids a large initial payment, it means you will pay interest on the fee over the entire loan term, increasing the total cost of borrowing.

Broker Fee

If you use a specialist commercial mortgage broker, they will likely charge a fee for their service. A good broker provides significant value by accessing a wide range of lenders, including those who do not deal directly with the public, and helping you find the most suitable and competitive deal for your circumstances. Broker fees can be structured as either a fixed fee or a percentage of the loan amount, and this should be clearly explained to you from the start.

Valuation Fee

Before a lender approves your mortgage, they need to be confident that the property is worth the amount you are borrowing against it. They will instruct a professional surveyor to conduct a valuation. The cost of this valuation is paid by you, the borrower.

The fee depends on the property’s type, location, and value. A simple valuation for a small retail unit might cost a few hundred pounds, while a detailed survey on a large, complex industrial site could cost several thousand. It’s an essential step, as the valuation report directly influences the lender’s final loan offer.

Legal Fees

Legal work is a non-negotiable part of any property transaction. For a commercial mortgage, you will need to hire your own solicitor to handle the purchase and legal paperwork. In addition, you are almost always required to cover the lender’s legal fees as well. This is because their solicitor needs to review all documentation to ensure the lender’s interests are protected. It’s wise to budget for two sets of legal costs when planning your finances.

Ongoing and Potential Future Costs

Beyond the initial setup, you should be aware of costs that occur during the life of the loan and at its conclusion.

Interest Payments

This is the primary ongoing cost of your mortgage. The interest rate determines how much you pay the lender for the privilege of borrowing money. Rates can be:

• Fixed: The interest rate stays the same for a set period (e.g., 2, 3, or 5 years), providing predictable monthly payments.
• Variable: The interest rate can go up or down, usually in line with the Bank of England’s base rate. This means your payments can change over time.

Early Repayment Charges (ERCs)

An Early Repayment Charge is a penalty fee that some lenders charge if you pay off all or a significant part of your mortgage before the end of a specific period, such as a fixed-rate term. Lenders use ERCs to ensure they recoup the expected profit from the loan.

ERCs are usually calculated as a percentage of the outstanding loan balance and can be substantial. It’s vital to check the terms of your mortgage offer for any ERCs, especially if you think you might want to sell the property or refinance the loan in the near future.

Exit Fee (or Closure Administration Fee)

Some lenders charge an administrative fee when you fully repay your mortgage at the end of its term. This is sometimes called a deeds release fee, as it covers the cost of sending the property’s title deeds back to you. This is typically a smaller, fixed fee, but it’s another cost to be aware of.

Other Potential Commercial Mortgage Fees

While less common or smaller in scale, other charges can apply in certain situations.

Bank Transfer Fee (CHAPS)

When the lender releases the mortgage funds to your solicitor, they do so via a CHAPS (Clearing House Automated Payment System) transfer. This is a same-day electronic transfer that usually incurs a small administrative fee, typically around £25 to £50.

Missed Payment and Default Charges

If you fail to make your mortgage repayments on time, the lender can apply penalty fees for the missed payment. Continued failure to meet your obligations can lead to the loan being placed in ‘default’. This has serious consequences. Lenders may increase your interest rate, take legal action to recover the debt, and ultimately seek to repossess the property to sell it and repay the loan. It is critical to remember that your property may be at risk if repayments are not made.

How to Budget for Commercial Mortgage Fees

With so many potential costs, careful planning is essential. Here are a few tips to help you budget effectively:

• Request a detailed illustration: Ask your lender or broker for a full mortgage illustration. This document should list all the known fees and charges associated with the loan.
• Set aside a contingency fund: As a rule of thumb, it’s wise to budget between 3% and 5% of the property purchase price for fees and other costs like Stamp Duty Land Tax.
• Consult a professional: A specialist commercial finance broker can provide a clear breakdown of expected costs and help you compare offers from different lenders on a like-for-like basis.
• Read the small print: Before signing any agreement, read the terms and conditions carefully to ensure you understand every fee, charge, and potential penalty. For more guidance on business finance, you can consult the UK government’s business finance and support information page.

By taking a proactive approach and accounting for all potential commercial mortgage fees, you can ensure your property investment journey starts on a solid and financially secure footing.