Are you looking to buy or remortgage a business property? If so, a commercial mortgage might be needed. But, how do these work?
In this blog, we’ll explain how this option works to help you understand the steps you may need to take to apply.
Commercial mortgages: How does it work?
Commercial mortgages work similarly to residential mortgages. Essentially, you take out a loan and agree to make regular monthly payments. The specifics of these payments depend on the type of product you choose.
If you get an interest-only commercial mortgage, you'll only pay the interest each month. However, a capital repayment mortgage means you will pay both the interest and some of the loan balance each month.
You'll need to keep making these payments until the loan is fully repaid, at which point the property becomes yours.
The loan is secured against the commercial property. So, if you fail to make payments, the lender can repossess the property to recover their costs.
How does the commercial mortgage process work?
Before you apply, it’s a good idea to make sure you understand the necessary steps and are well-prepared. Here’s a guide to help you understand the process:
Preparation
Start by carefully evaluating your needs, including the type of property you want to buy and the loan amount needed. Get all essential documents such as financial statements, business plans, and cash flow projections to make sure you have everything ready for submission to a lender. Additionally, check your credit score and your business’s credit history and correct any errors you find.
Research
The next step is to research providers to identify lenders and brokers who can assist you. It’s crucial to choose a broker or lender who aligns with your needs to make sure you get the right product. Take your time to research and consider your options, as this decision is key to the process. Check reviews, interest rates, terms, and any fees, including those for brokers and lenders. Don’t rush this step; careful consideration will help you find the best fit for your needs.
Pre-qualification
Once you’ve located a lender or broker you want to use for your application it’s time to enquire or express your interest. You can usually do this by visiting their website, calling their office, or submitting an enquiry form for a call-back. During this stage, you’ll need to give details such as the property value, the amount you wish to borrow, your income, and basic information about your business and financial situation. This helps the lender or broker assess potential solutions and determine your eligibility.
If they find a suitable option, you might receive a decision in principle or mortgage in principle, indicating that the lender is likely to approve the loan based on the information you’ve provided. However, this is not a guarantee of final approval, as issues could still arise. Nothing is certain until you have the funds.
Application submission
If the lender or broker has identified a suitable product, you can start with the formal application. At this stage, you'll need to submit documents, including financial statements, tax returns, business plans, property details, and any other information requested. Once the lender reviews and approves these documents, the process moves on to the valuation stage.
Valuation
At this stage, a property valuation will be conducted to verify its actual value and make sure it matches the information provided by the borrower. This process helps prevent the lender from giving you a loan based on an inflated property value. It allows the lender to accurately assess the application. The valuation can affect the terms, including the interest rate and repayment conditions, making it a key factor in shaping the final loan offer.
Formal offer
The lender will then provide a formal offer detailing the loan term, interest rates, and other key conditions. This is your opportunity to review the terms and negotiate adjustments if needed.
Legal work
Once the formal offer is accepted, the process moves to your solicitor, who will handle the legal work. The lender will provide your solicitor with a list of queries and requests that need to be addressed before proceeding.
Case completed
After the legal work is finalised, the funds are released to your solicitor. This marks the completion of the process.
It’s important to bear in mind that at any point in this process things can break down, so it’s always good to make sure you keep in close contact with your broker or lender and rectify any issues as soon as they arise.
Summary
Getting a commercial mortgage may seem complicated. By understanding each step, you can make the process easier. Whether you’re buying a new property or remortgaging, knowing what to expect will help you manage the process better.
Any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
