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Categories: commercial mortgages | guides

Getting an owner-occupied commercial mortgage is a big step for any business owner. Whether you are a seasoned commercial borrower or just starting, knowing how these mortgages work is essential.

We cover everything you need to know about these mortgages in this guide. We explore the benefits, downsides, and how to secure this type of mortgage.

Contents

What is an owner-occupied commercial mortgage?

First, what is a commercial mortgage? This type of mortgage is like a residential mortgage, but for buying property a business will occupy. For example, a shop, an office, or a factory.

An owner-occupied commercial mortgage describes a loan business owners get to buy a property for their own company to use. This could be a shop for a retailer, a garage for a mechanic, or an office for a company or other similar scenarios.

The main thing that makes it different is that the property is not for renting out to others. It is like when you buy a house to live in, not to rent out. The business owner pays back the loan, in the same way you would pay back a bank, when you buy a house with a mortgage.

When do I need an owner-occupied commercial mortgage?

Here are a few purposes for commercial mortgages for owner-occupiers:

  • You want to buy a building to run your business from, instead of renting.
  • You are currently renting a space for your business, but you have decided that it is better to own the property.
  • You need more space to expand your business.
  • Your current property is not right for your business anymore and you want to buy a new one.
  • You are starting a new business and want to buy a premises to operate it from

Benefits

These are a few of the many benefits of getting a commercial mortgage for your own business:

Ownership

Owning a property for your business can provide many advantages. As the property owner, you have full control over your business space. You can change it to suit the needs of your business, without having to get permission from a landlord.

Financial benefits

Owning a property for your business comes with several financial benefits:

  • Building equity: If you take out a capital repayment mortgage, every time you pay towards your mortgage, you own a little more of the property. This can be an asset for your business in the long-run.
  • Potential appreciation: Property values can increase over time. If the value of your business property goes up, the net worth of your business increases. You can then benefit if you decide to sell or refinance the property in the future (although there may be tax implications on the sale of the property).
  • Tax deductions: You can often deduct expenses related to owning and maintaining the property. This includes mortgage interest, property taxes, and certain maintenance or repair costs.

Stability

Owning the property provides a secure place for your business. When a business rents a property, the landlord can increase the rent or decide not to renew the lease. This could mean having to move the business, which can be costly and disruptive.

When you own a property, your mortgage payments can be more predictable than rental rates. This stability can make budgeting and financial planning easier for your business.

Downsides

Consider these factors before taking on an owner-occupied commercial mortgage:

Costs

Buying a property is expensive. The costs to consider before buying a commercial property with a mortgage are:

  • Deposit: You will need to provide a deposit of between 25% and 40% to secure a commercial mortgage. This can be a big expense for your business.
  • Mortgage payments: These are the monthly charges associated with borrowing. They can include part of the amount you borrowed and the interest, or just the interest. If you only pay the interest, you will not own the property outright at the end of the term.
  • Processing costs: These are the costs related to finalising the mortgage. They can include application fees, valuation fees, legal fees, and stamp duty.
  • Mortgage broker fees: If you use a mortgage broker to help you find and secure a mortgage, they may charge a fee for their services.
  • Insurance: If you have a mortgage, you will usually need to have building insurance to cover damage to the property. You may also need other types of insurance, like public liability insurance.

Time

Securing a commercial mortgage can take longer than securing a residential mortgage. These mortgages often involve complex property types that need extensive evaluations. This can increase the time it takes to get the funds you need.

Less flexibility

A commercial mortgage is a long-term commitment that usually lasts between 3 and 25 years. This means that if you need to move your business for any reason, it can be more challenging if you own your property. You would need to sell your property before you can move, which can take time or result in a loss in profits.

Risk

Taking on a mortgage comes with certain risks. Property values can go down as well as up. If the property value decreases over time, your investment could end up being worth less than what you paid for it. This would impact how you pay back your loan.

There are also risks if you cannot keep up with your mortgage payments. If your business faces financial difficulties that prevent you from paying your mortgage, you could risk losing the property. In a worst-case scenario, this could lead to the failure of your business.

What interest rates do you pay on an owner-occupied commercial mortgage?

Commercial mortgage interest rates are usually higher than residential mortgages because of the higher risk for lenders.

You can calculate your interest rate with a commercial mortgage calculator. You will fill in the property value, loan amount, and loan term. You will then receive an illustrative monthly payment based on current mortgage rates.

The interest rate you receive for your mortgage will depend on various factors. We highlight the factors that impact a commercial mortgage for owner-occupiers below:

Credit history

Your credit score and the credit score of your business are key factors. A stronger score can show lenders that you are less of a risk, which may mean you are eligible for lower interest rates than if you had a poor credit score.

A mortgage broker may be able to help you get a commercial mortgage with bad credit, because there are lenders who are set up to assist in some circumstances.

Commercial lending experience

Commercial lending experience can impact your ability to borrow. Lenders view past successful repayments as evidence of financial reliability and the ability to manage a commercial property and mortgage.

Owner-occupied commercial mortgages for brand new businesses are offered by fewer lenders, but may still be available. A specialist broker can help you assess your options.

Business profitability

Lenders will look at your business's financial situation. This includes your income, cash flow, and debt levels. If your business finances are healthy, you may qualify for interest rates with a wider range of lenders, and potentially lower rates.

Property

The industry the property will be used for affects the loan to value you can secure. Sometimes medical practices can secure up to 100% loan to value, whereas most other industries have a much lower cap.

Similarly, with a semi-commercial property comprising both business and residential rental elements, the loan to value will be affected by the proportion of each element.

The more residential the better (but we are specifically talking about a residential element that will be rented to a tenant, as self-occupation is capped at 40% of the plot).

Initial rate period

Depending on the state of the mortgage market, the length of the initial rate period of a commercial mortgage may influence the interest rate.

Loan to value ratio (LTV)

This is the ratio of the loan amount to the property's value. A lower LTV often means a lower interest rate because it reduces the lender's risk. Where the risk to the lender is reduced, rates are typically lower.

Deposit

As above, the size of your deposit can influence your interest rate, because it directly impacts the loan to value. A deposit reduces the lender's risk, which can result in a lower interest rate.

How do I secure an owner-occupied commercial mortgage?

Securing a mortgage involves several steps:

Determine your needs

It may sound obvious to say it, but being sure what you need a property for will help you secure the best mortgage for your business.

There is a lot of variation in interest rates, based on what you choose to do with a property.

If you intend to change the current use of property to suit your business, this may have an impact on the borrowing you need.

You also need to figure out how much your business can afford to spend. This means checking your current business finances and future projections.

Get advice

Using a mortgage broker can help you secure a mortgage for your business property. They have a deep understanding of the mortgage market and can help guide you through the process. They can help you find suitable lenders and ensure you understand the risks of taking on an owner-occupied commercial mortgage.

Apply for the mortgage

When you have found the right lender offering a suitable mortgage, you can then apply. You will need to fill out the application and provide various documents. The lender will use this information to decide your loan approval. A broker can help you with this, taking the majority of the work off your desk and onto theirs.

Complete the mortgage

When the lender approves your loan and all the legal work done, the mortgage can complete and the money transferred. This involves signing legal documents that transfer ownership of the property to you. You will then start making your mortgage payments.

How Commercial Trust can help you secure a commercial mortgage

Commercial Trust are experts in commercial mortgages.

We have access to a wide range of lenders in the UK. This means we can find a mortgage deal that is right for your business. Our expert team will use their knowledge to help you pick the best loan for your money and situation.

Get in touch with an expert mortgage broker for your owner-occupied commercial mortgage.

FAQs

An owner-occupied commercial premises is a property that a business owner uses for their own business. For example, a restaurant owner might buy a building to use as their restaurant. It is different from an investment property, which is a property you buy to rent out to others.

Yes, you can use commercial property as collateral for a mortgage. You can either remortgage and raise capital from any available equity, or take out a second charge commercial mortgage, which is a second loan on the property, to raise a deposit.

This means that you don’t have to raise a deposit from savings, but does risk that the lender can take possession of the property if you cannot make your mortgage payments.

An investment property is where you buy a building to rent it to one or more tenants. An owner-occupied property is where you as the owner will occupy the property yourself. In the case of a commercial owner-occupied building this would mean your company occupies it. With a residential property it would mean you would live in it.