Commercial Mortgages for UK Businesses

A commercial mortgage is similar to a residential mortgage in that funds can be borrowed over a long period of time, usually a maximum of 30 years, secured by a first charge on the property being bought.

In taking first charge, the lender is first in the queue to recover any debt if the property ever needs to be sold. This could happen because the mortgagee wishes to move on and sells, or perhaps has defaulted on the repayments causing the lender to foreclose.

If a first charge mortgage already exists, it is common for different lender to advance funds secured by way of a second charge which puts that lender as second in the 'security queue'.

Unlike residential mortgages, nearly all commercial mortgages are variable rate loans which fluctuate in line with the Base Rate set by the Bank of England's Monetary Policy Committee. So, if a lender offers terms which include an interest rate of say '2% over base' then a base rate of 4.5% would result in an interest rate of 6.5% being applied to the loan.

Some lenders will link their interest rates to LIBOR, which is the London Inter Bank Offered Rate. LIBOR is published daily in the Financial Times and can be found on a number of other financial websites.

Commercial Mortgages can be secured against most types of Freehold or Long Leasehold properties, such as shops, pubs, care homes, restaurants, offices, industrial units, blocks of flats and more. The procedure is very similar to that of its residential cousin except that the general maximum that can be borrowed is 60% of the assessed Market Value, although one or two lenders will advance up to 75% depending upon the proposal.

These percentages are known as the Loan-to-Value ratio, or LTV. The lower the LTV the lower the risk to the lender. The higher the LTV, the greater the risk to the lender and it is likely that a higher interest rate would be charged.

Lenders will not generally advance above 75% LTV to try to ensure that there would be enough security in the event of a forced sale, perhaps through auction when it is expected that property will sell at a discounted rate.