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Commercial Mortgages Comparison: How To Navigate Your Options

Commercial mortgages can provide businesses with an opportunity to grow, but understanding them, and ensuring that you get the best deal can be quite daunting. In this article, we will highlight some of the key things to consider your undertaking commercial mortgage comparison.

So what is a commercial mortgage and how is it different?

Simply put, commercial mortgages are designed to enable to the purchase of business property, and thus help sustain, or grow business activities. When compared to residential mortgages, commercial mortgages usually attract higher interest rates as the business is regarded as a higher-risk investment than say, a person’s home.

In addition, the value of the mortgage loan is generally higher to reflect the higher value of the property, and often, the Loan-to-Value Ratio (LTV) is lower, meaning the borrower is required to provide a larger deposit than for a residential mortgage.

What factors can influence commercial mortgage rates?

Commercial mortgage rates are often influenced by a broad range of variables, including:

Market Conditions: Economic growth, inflation, and interest rates set by central banks all impact commercial mortgage rates. In times of economic expansion, rates tend to rise, while during recessions or periods of low inflation, rates often drop.
Loan Type and Term: Fixed-rate loans typically have higher interest rates than variable-rate loans but provide stability. Loan terms, often ranging from 5 to 20 years, also affect rates, with longer terms generally carrying higher rates.
Loan-to-Value Ratio (LTV): Lenders evaluate the risk of the loan based on the property's value versus the amount borrowed. The lower the LTV ratio, the lower the interest rate, so borrowers who make larger initial deposits often receive more favourable rates.
Creditworthiness: A company’s credit history and overall business health are important in determining the interest rate and also if you are eligible for the loan, a major part of the commercial mortgage criteria. A higher credit score or strong financial standing can lower the perceived risk to the lender, and lead to better rates for the borrower.

How to make sure you're getting the best deal

Compare commercial mortgage rates from different lenders

It’s a time-worn saying, but “it pays to shop around”. When considering mortgages, it’s always important to compare rates and do proper research. Comparing lender quotes allows borrowers to weigh options and select the most competitive rate.

Banks vs. Non-bank Lenders: Traditional banks often offer lower interest rates but may have more stringent requirements. Non-bank lenders, including credit unions, may offer more flexible terms or a quicker approval process, but often at a slightly higher interest rate.
Mortgage Brokers: Engaging a mortgage broker can help streamline this process. Brokers have access to a wide network of lenders and can help match borrowers with lenders that offer the best rates based on their unique financial profiles.

Consider the type of Commercial mortgage you require

Repayment Mortgages - Repayment mortgages allow you to reduce your debt over time as you pay off both the loan amount and the interest each month; giving you a completely end point as to when the loan will have been repaid.
Interest-Only Mortgages - For this option, you only cover the interest each month. This keeps your monthly costs down, but you’ll need a solid plan to pay off the loan’s balance when the term ends.
Roll-Up Mortgages - These are an option that can be suitable if you plan to dispose of the property; for example, those who are improving a property to increase it’s value before selling it. Roll-up mortgages add the interest to the loan’s balance and allow you to pay it all at the end. It’s a way to keep cash flow steady while you’re developing the property.
Offset Mortgages - If your commercial mortgage has this feature, and your property generates a rental income, the rent you earn can directly lower your interest payments each month.

Plan and negotiate ancillary fees

When you get a commercial mortgage, be aware that there will be additional fees to pay. Not all may be applicable, so it makes sense to compare fees from different lenders and ask if any can be reduced or waived.

Valuation Fee – This covers the lender’s cost to assess the property’s value. It can range from £500 to £1,500, depending on the property.
Legal Fees – You’ll need to cover the cost for a solicitor to manage the legal aspects. Expect to pay between £500 and £5,000, significantly varying based on transaction complexity.
Surveyor’s Fee – If a detailed survey is needed, it could cost you from £400 to over £1,000. This fee ensures the property’s condition is thoroughly evaluated.
Booking Fee – Some lenders might ask for a booking fee to lock in a mortgage deal, typically around £100 to £250.
Arrangement Fee – Lenders charge this for setting up your mortgage. It’s often 1% to 2% of the loan amount, sometimes payable upfront or added to your mortgage balance.
Broker Fee – Using a mortgage broker might add a fee of £500 to £1,000 to your costs, though some brokers are paid via commission from the lender instead.
Early Repayment Charge – Paying off your mortgage early might incur a charge, often a percentage of the loan amount. This can vary widely, so check with your lender.
Exit Fee – When you pay off your mortgage or switch to another lender, an exit fee of around £100 to £300 may apply.

Lock in Rates at the Right Time

Interest rates fluctuate in response to economic conditions, and timing can play a significant role in securing the best rate. Borrowers should keep a close eye on market trends to identify the most favorable time to lock in a mortgage rate.

Improve Financial Standing Before Applying

Borrowers who are in strong financial health are better positioned to secure favorable mortgage rates and should therefore seek to;

Increase Credit Score: Lenders assess credit scores to determine the risk associated with the loan. A higher credit score can result in lower interest rates.
Strengthen Financial Statements: Lenders will carefully review balance sheets, income statements, and cash flow reports. Businesses with strong financials are more likely to secure favorable terms.

Conclusion

Navigating commercial mortgage rates requires a combination of market awareness, comparison shopping, negotiation skills, and financial preparation.

Here’s a reminder of the things you can do to help get the best deal:

Boost Your Deposit. This reduces your LTV ration, presenting you as a safer bet to lenders.
Check Your Credit. Ensure your credit is excellent as it influences the rates you receive.
Do Your Research. Explore options across high street and specialist lenders to find the best terms.
Choose the Product and Right Rate. Decide if a fixed or variable rate best suits your business.
Look to negotiate. Look at lenders that offer reduced fees, or are willing to waive them.
Prepare Your Documentation. Gather all necessary paperwork, like business accounts and tax forms, beforehand to expedite the application process.
Consult a Broker. Engage a commercial mortgage broker, like Finance Nation, for expert advice and access to the best deals.

Finance Nation

If you want to dive straight into exploring options for commercial mortgages, you're already in the right place.

Finance Nation is a finance broker that understands the challenges faced by businesses seeking the most time and cost-effective solutions, and we're here to help.

With our cutting-edge Fintech platform, we ensure seamless access to tailored solutions that suit your needs.

With access to lending products you might not find elsewhere, we'll identify the best deals for you and keep things moving until the funds are where they need to be.